Stablecoins have gained more prominence in the cryptocurrency space, spurred particularly by the slump in digital asset prices after the 2017 bull run. This slump caused a fundamental shift in investors’ mindsets, as they started to look for cryptocurrencies with higher stability. Hence the search for the best stablecoins.
Yet, that’s not the only reason why stablecoins have managed to stay popular even in 2022. Stablecoins are go-to fiat replacements across a crypto exchange (s); centralized and decentralized, notwithstanding. Additionally, with the U.S. Feds hiking rates aggressively — making the dollar reserves dearer — even new players have started taking a shot at the stablecoin space.
It is tricky to identify the best ones in a crypto space rife with stablecoins. But, we are going to do exactly that, throughout the subsequent sections.
What are stablecoins?
In its simplest sense, a stablecoin is a form of digital currency that provides price stability via backing by a reserve asset.
Cryptocurrencies have become popular over the years. But, when most people talk about crypto, they are thinking about BTC, ETH, XRP, and a select few others. The problem with this set of assets is the volatility.
There are several reasons why the market is so unpredictable. Chief of the reasons has to be the market size. Despite the media attention, the cryptocurrency market is still small when you compare it to well-established markets like the U.S. stock market or the gold market, in terms of market capitalization.
With crypto, a small movement of funds could create a ripple effect on the market. You also have to look at the technology backing them. Blockchain is still a nascent tech that has room to grow. Many companies have started adopting the technology, but it would take a while for it to mature.
So, while it has proved itself to be a willing store of wealth, frequent price crashes, as witnessed in “crypto winter,” would always affect its standing as an investment vehicle.
The need for stablecoins
Reducing volatility: This is the most pressing need for stablecoins. Traditional cryptocurrencies are volatile, and investors wanting to participate in the market need assets that can at least promise a considerable level of stability. Improved stability also helps with market predictions and institutional investment.
Cryptocurrency adoption: Whether for retail or institutional investors, digital assets that are highly volatile are just a hard sell. Their volatility hinders adoption by businesses and for making payments. Stablecoins can speed this up and attract more investment into the cryptocurrency sector. Also, users can convert many stablecoins into traditional cryptocurrencies. A popular trading pair, for example, is BTC/USDT.
Hedging: By virtue of their stability, stablecoins provide investors with the option to hedge their wealth against uncertainty. Even citizens in inflation-ridden economies can use stablecoins to preserve their wealth, often as a store of value. According to the 2022 Global Crypto Adoption report released by Chainalysis, Latin American countries like Argentina and Venezuela are seeing their fiat currencies lose value. This development has made them look at the top stablecoins — pegged to the U.S. dollar — as hedges against inflation.
The advantages of stablecoins
- Stablecoins provide the same benefits as cryptocurrencies (low transaction fees, fast transactions, security) while still providing the stability that traditional digital assets lack.
- Regulatory control
- They aid cryptocurrency adoption.
- They’re perfect for different investors, regardless of their risk profile.
- The inclusion of smart contracts protects all parties in a transaction.
Types of stablecoins
Stablecoins function in different ways. The way they’re set up also determines their characterization. The major types of stablecoins that we have are:
1. Fiat-collateralized stablecoins
Fiat-collateralized stablecoins are the ones that have fiat currencies to back them up. So, for every single fiat-collateralized stablecoin issued, a unit of the pegging fiat asset — say $1 — is kept safely in a custodian. This means you can exchange a fiat-collateralized stablecoin for its cash equivalent seamlessly and without much money spent.
The company behind a fiat-collateralized stablecoin can issue as many coins as are required, as long as they have the cash reserves with the concerned fiat currency to back this issuance up. Essentially, there needs to be a 1:1 ratio of the stablecoin and the reserve that the issuing company has in collateral (the coin can be pegged to the U.S. dollar for example).
The tokens in circulation are also audited to prevent issuing companies from sending out more coins than the cash in reserves.
There are also resource-collateralized stablecoins. Although these are less popular, they get their backing from the price of a specific resource. The Venezuelan government launched Petro, its official stablecoin, in 2018, announcing that the asset’s price will be tied to that of a barrel of oil. Resource-collateralized stablecoins follow the same rule as their fiat-collateralized counterparts and only differ in terms of the backing asset.
Some resource-collateralized stablecoins are also termed commodity-backed stablecoins — owing to the nature of the peg. Examples include Paxos Gold (PAXG) — a stablecoin that uses gold as collateral.
Some examples of fiat-collateralized stablecoins include Tether (USDT), Paxos Standard (PAX), and TrueUSD.
- They’re stable as the collateral is usual cash and cash equivalents.
- Their structure is simple to understand.
- They come with a centralized presence, which opens them up to attack
- You also need to trust the central entity, which negates the key principle of decentralization.
2. Crypto-collateralized stablecoins
Crypto-collateralized stablecoins are backed by cryptocurrencies, rather than fiat pegs. However, since the extended market volatility of cryptocurrencies is bigger than that of fiat currencies, crypto-collateralized stablecoins usually require more than a 1:1 ratio of coins to reserves — a phenomenon known as “overcollateralization.”
Overcollateralization can help to maintain decentralization as well, as the crypto reserves absorb the effect of any price fluctuations. The only significant problem that these assets have, of course, is that launching them will require more in terms of capital. A prominent example of a crypto-collateralized stablecoin is MakerDAO’s DAI.
Here is how overcollateralization works: if you choose to buy $1,000 worth of DAI, you would require to deposit ETH worth $2,000. This figure isn’t true to the letter but a hypothetical version of how 2:1 overcollateralization works.
- They’re decentralized, so they comply with the tenets of cryptocurrencies.
- They can be used to create leverage for trading, thanks to overcollateralization.
- They do have public blockchains, so transactions are transparent.
- Being backed by a cryptocurrency heightens volatility.
- Their structures are more complex to understand.
3. Uncollateralized stablecoins
The uncollateralized stablecoins essentially throw the concept of backing and collateral out. These assets work like reserve banks; they monitor demand and supply, and purchase circulating coins when prices are at rock bottom. When prices rise, they issue new coins. The objective of these coins is to keep their prices in tandem with those of the pegged asset. A prominent example is BASIS.
Then there are algorithmic stablecoins that are uncollateralized and rely completely on smart contracts and specialized algorithms to maintain value. These digital assets rely on the demand-supply cycle to generate themselves. UST — Terra’s popular yet infamous stablecoin — is the name that rings when we discuss algorithmic stablecoins.
- They’re decentralized since all adjustments are made on-chain.
- Values are adjusted based on market forces, so they’re rather stable.
- Coins are minted or destroyed by an algorithm, so there’s no need for collateral.
- They’re not backed by any asset, so their structures are also complex.
Why are stablecoins so popular?
Stablecoins’ raison d’etre is simple — they provide stability, thus eliminating uncertainty for both consumers and investors in the crypto market. Venezuela, for instance, has been dealing with uncertainty as far as its fiat currency — the bolivar — has been concerned due to the country’s economic woes. So, it elected to launch the aforementioned Petro to help.
Stablecoins provide safe asset storage, especially when the traditional crypto market becomes volatile. Customers who fear murky market conditions can easily swap their unbacked cryptos for stablecoins, thus eliminating the need to convert to fiat — an asset class that’s not immune to unfavorable times. Furthermore, since conversions between stablecoins and other cryptocurrencies make for crypto-to-crypto conversions, transfers are still cheap. There are no fees given to third parties — payment processors, banks, etc. — which is the case when dealing with cash and cash equivalents.
The best stablecoins available
1. Tether (USDT)
Tether is the most popular stablecoin in the world, at least in terms of market cap. And you might just consider it one of the best, globally popular stablecoins.
It started back in 2014 and has now grown to become the third most valuable digital asset. Tether is an ERC-20, fiat-collateralized asset that’s backed by the dollar. Furthermore, Tether (USDT) plans to expand its ATM horizon across Brazil — with availability extending to over 24,000 ATMs. It is the most dominant stablecoin in play and is doing really well recently due to the surging interest rates and dollar strengthening.
2. USDCoin (USDC)
USD Coin (USDC) is a fiat-collateralized stablecoin that is pegged 1:1 with the dollar (obviously). CENTRE is the brain behind USDC — a joint venture between payment processor Circle and crypto exchange Coinbase. It’s also available on most popular crypto exchanges.
USDC is the second-largest stablecoin by market capitalization and even includes Treasury Bills as part of the collateral consortium. Brian Armstrong, CEO of Coinbase said that USDC is on its way to becoming the de-facto CBDC (Central Bank Digital Currency) across the U.S.
USDC lives on the Ethereum blockchain, and it works as an Ethereum token. The issuers also maintain popular financial services company Grant Thornton as auditors for its reserves.
3. Binance Coin (BUSD)
Binance USD or BUSD is yet another popular stablecoin, featuring a 1:1 peg with the U.S. dollar.
As the name suggests, this is a Binance-driven stablecoin, which ranks seventh worldwide, in terms of market capitalization.
Binance USD or BUSD developments — monthly audits to be precise — is viewable on the official website. Also, BUSD started as an ERC-20 token but also supports the BEP-2 — a token standard relevant to the Binance Chain.
4. Dai (DAI)
DAI was developed in 2017 by MakerDAO, a decentralized, autonomous organization that is currently working on what it believes is a “new way of approaching stablecoins” — whatever that means.
Unlike the tokens above, DAI is a crypto-collateralized stablecoin. While it has been criticized as being overly complex to be understood, the asset’s model is becoming popular and is an important aspect of DeFi.
5. TrueUSD (TUSD)
As its name suggests, TrueUSD is another “dollar-backed” stablecoin — on the Ethereum blockchain. TrueUSD shares quite a lot of similarities with Tether and yet is not a crypto exchange favorite like the latter.
The company makes a point to provide full transparency with investors and customers. They make regular attestations and also publish financial reports on Twitter.
Ex-workers from UC Berkeley, PwC, and Google manage the TUSD token. The issuers also plan to tokenize other real-world assets, such as TrueYen, TrueBond, and TrueEuro, to mitigate price fluctuations.
6. Decentralized USD (USDD)
USDD is a popular stablecoin and TRON DAO’s brainchild. Justin Sun — Founder of TRON — launched USDD in April 2022. Most importantly, this stablecoin is compatible with the token standards relevant to three individual blockchain ecosystems — Ethereum, BNB Chain, and obviously TRON.
Despite a clear lack of history, USDD has quickly climbed up the popularity charts with Justin Sun claiming that USDD will offer 30% APY — annual percentage yield — to its investors. Coming to the collateral, USDD maintains a direct 1:1 peg with the U.S. dollar via a set of algorithms and an overcollateralized crypto basket. This approach qualifies USDD as a hybrid stablecoin.
7. Gemini Dollar (GUSD)
Gemini Dollar or the GUSD is a stablecoin relevant to the crypto exchange Gemini. It is an Ethereum-based ERC-20 token, capable of bridging the CeFi-DeFi gap. GUSD has built-in smart contracts and has the backing of NYDFS (New York State Department of Financial Services). It was also the first dollar-pegged stablecoin to get this kind of regulatory backing.
GUSD ranks 71 in terms of market cap. And it was ideated and developed by the Winklevoss brothers. Some of the more popular GUSD use cases include its presence as a method of transaction, the ability to earn 9% interest rates, support at specific retail outlets, and more.
Are these really “Stable” coins?
The UST implosion came with several questions — related mostly to the stability and credibility of algorithmic stablecoins. But that wasn’t the only thing this space had to endure. In early September, MakerDAO proposed some far-reaching changes to DAI, including a partnership with a traditional bank.
On top of that DAI-USD pegging was the talk of the town during that time, with MakerDAO Cofounder Rune proposing a collateral shift to Ether from the existing USDC. And these periodic developments show that even the best stablecoins need to go through phases of sentimental headwinds. Regardless, we shall keep watching this space and report new stablecoin developments, as and when they happen.
Frequently asked questions
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What is the best stablecoin and why?
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