Take a closer look to understand.
Typically Cryptocurrency is volatile. Meaning the value rises and falls sporadically. Stable Coins hold an advantage over Cryptocurrency because of this very thing, since Stable coins retain their value.
The need to store or HODL the coins with the knowledge the value will remain, and you can feel confident of the worth of your holdings is a much sought after attribute.
So, then. Of what use are Stable Coins?
Stable coins are cryptocurrencies tied or “pegged” to the value of a “fiat” currency, perhaps the USD or Euro, or to a commodity such as gold.
Especially important to retailers who accept the smart coins as payment for goods. This “pegging” eases their minds that the value will hold, and they won’t be left holding an empty bag.
Smart Coins are used to protect the trader’s portfolio’s value in times of bear markets. They simply convert their assets (all or part) to Smart Coins to avoid cashing them out to fiat.
In the DeFi System (decentralized finance), Smart Coins are likely to be used in the loan industry by adding the loan agreement to Blockchain’s security.
Everywhere you look, in recent days, companies are bringing this idea to fruition with new products such as Peer to Peer loans. Without a doubt, Stable Coins will play an essential role because of the Stable Coins holding their pegged value to fiat or precious metals. This need for a volatility-free means of transacting without losing cryptocurrencies will play an essential role in the future of loans.
Three Types of Stable Coins
Categorized broadly, these are the three types of Stable Coins.
Centralized Stable Coins Backed By FIAT
These Smart Coins are fungible with the Fiat coin they represent. Tether (USDT), USD Coin (USDC), Gemini USD (GUSD), to name a few. They are centralized because they are governed and controlled by a central organization, which launches them, whether it’s a bank, a company, or government.
Decentralized Stable Coins Backed By Crypto
Decentralized Stable Coins are instead governed by a consensus of users who are part of the network.
DAO’s Stable Coin – DAI is an example. Traders can accumulate a certain amount of Ethers and use it as collateral for borrowing DAI, which pegged to the US Dollar holds its value.
Decentralized Algorithmic Stable Coins
New on the scene, and since they don’t have collateral backing such as fiat or precious metals, they rely on algorithms to set price and to remain stable.
A Few of the most popular Smart Coins:
Tether, created in 2014, is undoubtedly the market leader in Stable Coins. Tether converts cash to Digital Currency with a 1:1 conversion rate. The claims that “every Tether is always backed 100% by the company reserves, which include fiat and cash equivalent is on their website.
There are several networks that Mine USDT. As of 6/29/2020, these networks include Omni, Ethereum, Tron, EOS, and Liquid.
USDT operated by Tether Limited (closely associated with iFinex) is the parent company of Bitfinex, a well-known exchange. This fact has brought much controversy to the Stable Coin. In 2017 the CFTC subpoenaed both Tether and Bitfinex. Possible reasons were lack of security audits, as well as alleged Bitcoin price manipulation.
Market Cap: $9,632,517,603
USD Coin (USDC)
The US crypto exchange launched the Stable Coin, USD Coin (USDC), Coinbase, together with trading desk and OTC – Circle. And by design, pegged to the USD 1:1.
Coinbase claims on its website that each USDC is backed by one US Dollar, which they retain in bank accounts.
USDC is powered by Ethereum blockchain, as an ERC-20 token.
Market Cap: $983,243,174
True USD (TUSD)
Another ERC-20 based Stable Coin is TUSD and pegged to the USD 1:1. You can find TUSD supported on more than 70 exchanges around the world.
TUSD’s issuer also released Stable Coins pegged to other Fiat Currencies: those include TrueGBP, TrueAUD, TrueCAD, and TrueHKD
Market Cap: $0 Launch Date: January 2018
The main difference in DAI and the above Stable Coins is that unlike those DAI is decentralized with the value still pegged to the US Dollar 1:1
MKR token holders govern DAI. The Maker protocol is the smart contract behind the DAI Stable Coin.
DAI comes with many benefits. It’s immutable, censorship-resistant, and entirely transparent by design and not controlled by any company, bank, or government.
DAI is working in one of the emerging fields of cryptocurrencies and blockchain-based technology: decentralized finance (DeFi).
All decentralized Stable Coins, such as DAI, share a common threat: hacking to the smart contract. If DAI coins are stolen, there is no physical backup of the DAI.
Market Cap: $0 Launch Date: December 2017
Launched by: Maker Ecosystem Growth Holdings, Inc.
Gemini Dollar (GUSD)
Tyler and Cameron Winklevoss issued The Gemini Dollar (GUSD) through the Gemini Trust Company, which they are the owners. GUSD claims to be the first-ever regulated Stable Coin.
The ERC-20 based GUSD cryptocurrency is pegged to the US Dollar 1:1, and State Street Bank and Trust Company hold the Currency that backs the Smart Coin.
The website claims every month, the USD held in the bank is audited. This assures the proper pegging, and all reports are published for anyone to see online.
Launch Date: September 2018
Launched by: Gemini Trust Company LLC
Binance USD (BUSD)
Resulting in a partnership between Binance and Paxos, the Binance USD or (BUSD) launched, and they received the approval from the New York State Department of Financial Services (NYDFS).
Launch Date: September 2019
Launched by: Binance, Paxos
Stable Coins are digital, programmable, and blockchain-based and apart from pegging and stability, some of the other advantages include:
The sends are direct and immutable. No borders or intermediaries needed; they can’t be blocked or censored, and the transactions are added to the Blockchain for security.
No intermediaries of the Stable Coin transactions make for much cheaper than traditional transactions.
Blockchain-based transactions and traditional transactions are very different in the time it takes for the receiver to see the funds in their account. Perhaps because of verifications and anti-money laundering (AML) processes, but maybe also an important one is that there are no intermediaries or waiting periods.
Since the Stable Coin transactions are done on public blockchains, Users can monitor each one. This monitoring is impossible with traditional payments, and it provides the much-needed transparency people are looking for today.
Stable Coins are not volatile. Lack of volatility is a significant benefit when sending or receiving funds for anyone looking for safe alternatives to Bitcoin and other cryptocurrencies.
Cons of Stable Coins:
An individual organization controls the majority of Stable Coins. Meaning the Stable Coin, though decentralized, is owned by a single entity that controls its issuance and minted supply.
This goes against the idea of Cryptocurrencies because it gives authority similar to what banks currently have. However, not all Stable Coins are centralized (DAI, as mentioned above).
Depend On Traditional Financial Markets
Stable Coins are usually pegged to fiat currencies. This pegging dictates that their value depends on the current conditions of the global economy. Making them subject to inflation that FIAT currencies have.
The lack of regulation in the ecosystem is something that all cryptocurrencies share. Stable Coins are no exception. They must come a long way before they grow into their intended purpose and used as a means for transacting money
Almost no one would argue that Smart Coins have a place in the cryptocurrency markest. They provide a bridge between fiat and cryptos.
Yet, the concern is that crypto users are too reliant on stable coins. A worry is that their absence or potentially a crash of Tether or any other leading Stable Coin could harm the crypto space more than any hacking incident or FUD story could ever bring about.
Ultimately, for Stable Coins to remain an essential part of the crypto space, a regulatory compliant framework would be necessary to allow a significant degree of decentralization and censorship resistance.