Stablecoins

A stablecoin is actually a stable cryptocurrency. As such, it addresses one of the biggest problems of cryptocurrency space: the high volatility of prices. The price of a cryptocurrency can change by 10-20% or 100-200% in a single day (however, this is less and less the case for the most valuable cryptocurrencies like Bitcoin). The operation of stablecoins is simple. If the price of bitcoin is $6,000 and you exchange 1 bitcoin for a stablecoin backed by the USD, you will own 6,000 of this stablecoin. If Bitcoin drops to $5,000, you will still have $6,000 in stablecoins. Conversely, if Bitcoin rises to $7,000, you will still be able to hold only $6,000 in stablecoins.

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How does it work ?

  • Stablecoins are cryptocurrency tokens that work on a blockchain, often Ethereum. To guarantee stability, they must be indexed to an asset whose value is recognized by all, or guaranteed by a promise of credit from an extremely reliable source.
  • For example, the value of the USD Coin (USDC) never deviates from that of the dollar. It is backed by dollars actually stored in financial institutions. Monthly audits guarantee the sequestration of these dollars to maintain this 1:1 parity.
  • Not all securities are fully backed by a fiduciary currency or commodity currency such as gold; they may also be backed by other cryptocurrencies. That said, keep your ears wide open: the negotiation of these stability remains widespread.

What are the different types of stablecoins ?

All stable parts have the same objective, but each has a different mechanism. There are three types of stability. The first is the fiduciary guarantee, or “secured fiat” (the fiat is a traditional currency like the dollar and the euro). This model means that the stablecoin issuing entity has a bank account containing the value of the token issued in fiduciary currency. For example, if they put a $1 million back-to-back coin into circulation, they must have $1 million in their bank account.

The second is crypto-collateralization, a coin backed by another cryptocurrency. To compensate for volatility, stable coins are overvalued. For example, $1,000 of bitcoin may be requested to issue a stablecoin of $500. Even if bitcoin loses 30% of its value, stable coins are still covered. The third is unsecured and unsecured. In this case, stablecoin is guaranteed by its value only by means of intelligent contracts (self-executing contracts). If the total demand for stable coins increases or decreases, the contract will automatically change the number of coins in circulation to keep the price stable.

Why are stablecoins important ?

The USDC Stablecoin, for example, is fully backed by the US dollar against which it can be traded at one-for-one parity via platforms such as Coinbase and Circle. Like many other facilities, the USDC is currently running on the Ethereum blockchain. Stablecoins, if they do not have the volatility of traditional cryptocurrencies, inherit some of their most essential properties :

  • The facilities are open, international and accessible to all on the Internet, 24 hours a day, 7 days a week
  • Their transmission is fast, cheap and secure
  • Their native form is digital, online and programmable

What are the advantages of stablecoin for the sector ?

Price-stable cryptocurrencies have reassured many players, primarily institutional investors, who fear for the most part the risks of volatility (particularly in sharp decline), particularly those located in countries concerned about inflation. Investors are also betting on short-term stability until the market stabilizes again. They don’t make money, but the funds are secure. For the same reason, retailers almost always refuse to accept bitcoin. If stability is proven, traders may be tempted to integrate it into their payment systems.

For their part, cryptocurrency exchanges can add new cryptocurrency pairs to earn more. Stablecoins are a good alternative payment method as some platforms do not accept the USD (especially Asians) due to lack of agreements with banks to obtain the currency.

What are the criticisms of stablecoin ?

First, most of the old stable parts projects have failed. Ethereum co-founder Vitalik Buterin studied this subject a few years ago without success. The most frequently cited criticism is the lack of decentralisation, since stability is based on a single entity. Some members of the cryptographic community also believe that these types of assets increase volatility in the cryptographic world as they require more speculation.

Finally, the most famous of the stablecoins Tether has been the subject of several controversies. His parent company, Bitfinex, was accused by the community of not holding the dollar equivalent of the $2.2 billion issued in Tether, and never provided any evidence to the contrary. At the end of January, the company even announced the end of its partnership with the audit firm Friedman. Finally, a recent study conducted by researchers at the University of Texas states that the price of Bitcoin was manipulated by Tether between March 2017 and 2018. The authors observed that when the price of bitcoin dropped, Tether made a large number of buybacks.

What can you do with Stablecoins ?

  • Limit volatility. The value of cryptocurrencies like bitcoin and ethereum fluctuates enormously, sometimes from one minute to the next. With the asset backed by a more stable currency, buyers and sellers are confident that the value of their tokens will not vanish or suddenly collapse in the short term.

 

  • Trade or register assets. No bank account is required to hold securities, which are easy to transfer. Sending stability around the world is a breeze, including in countries where the US dollar can be difficult to obtain or where the local currency is unstable.

 

  • Combine interest you can easily collect interest (usually more advantageous than those offered by a bank) on an investment in stability.

 

  • Transfer money at a lower cost. You can send $1 million from USDC with less than $1 fee.

 

  • Send money all over the world. Fast and cheap, “stablecoins” like the USDC are a good choice to send money around the world.

What is the difference between an ETF and a stablecoin?

A listed index fund (ETF) is a financial product that reproduces changes in an index. Bitcoin ETFs allow investors to speculate on cryptocurrency stars without buying them directly. Since they are publicly traded, they can be exchanged instantly during a session and have low brokerage fees. They also avoid the risks inherent in the possession of cryptocurrencies, such as theft, platform stops, etc. On the other hand, if the issuer of a Bitcoin ETF goes bankrupt, investors lose their stake.

Top 10 Stablecoins

tether logo

#1 Tether

USD Coin logo

#2 USD Coin

Binance USD logo

#3 Binance USD

terra usd logo

#4 Terra USD

dai logo

#5 Dai

magic internet money logo

#6 Magic Internet Money

frax logo

#7 Frax

true usd logo

#8 TrueUSD

pax dollar logo

#9 Pax Dollar

liquity usd logo

#10 Liquity USD

Learn more about crypto ranking with our current Top 300 Cryptocurrencies.

More informations

Check out our Asset Backed Tokens article

Read more about the indices