What are Stable Coins?

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 (USDT)

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

Dai (DAI)

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.

Blockchain: Ethereum

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

Blockchain: Ethereum

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

Blockchain: Ethereum

Stable Coins are digital, programmable, and blockchain-based and apart from pegging and stability, some of the other advantages include:

Borderless Payments

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.

Low Fees

No intermediaries of the Stable Coin transactions make for much cheaper than traditional transactions.

Faster 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.

Transparency

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.

No Volatility

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:

Centralization

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.

Unregulated

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

Conclusion

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.

About the author

Gail holds one of the most challenging role in the Compumatrix Leadership: Membership. She ensures that that members and potential members enjoy the benefits of being part of the Compumatrix community.

Comments

  1. “All decentralized Stable Coins, such as DAI, share a common threat: hacking to the smart contract.” Is this related to direct hacking to the smart contract technology itself ? I was under the impression that smart contracts were almost impossible of hacking. So this is not the case according to that Gail’s statement. It would be interesting if we could have some more articles exploring the dangers of this field or deepening this subject.

    1. Smart contracts in themselves are not that old. They came up only around a decade ago.Smart contracts are basically code, so it is possible to hack them. On the other hand Once smart contracts are placed on the Blockchain, they become immutable, meaning that the address and code can not be changed. However, an intermediary smart contract can be used to change the coding and address so all communication will be transferred to the “new” smart contract. This will have the same contract address, but it will execute a different smart contract code at the end from the updated smart contract. Jeimes,Do some research on your own for more information.

      1. I agree Richard, the concept of Smart Contracts came about after the introduction of Bitcoin. So, yes it’s relatively new too. I believe as they examined the Blockchain for possible applications, this idea w,as born and they went to work developing it. Now, several coins and blockchains offer Smart Contracts as the concept expands. I also agree that anyone should do their research and learn for themselves how things work and what’s on the horizon!

  2. Hi Jeimes…that would be proper research and blog material for you! Why not become an author and join in the fun? It is rewarding as far as points, plus gratifying to learn and grow! Come on in and join us and get your feet wet, as a matter of fact, get your whole body in the water. LOL

  3. Thank you for this explanation of the Cryptocurrency Stable coins. I appreciate the value they have. I have been contemplating converting some of my digital assets at some time in the future into stable coins to prevent a big fluctuation in my net worth. The list of stable coins mentioned is amazing. I did not know about some of them. I think this is an area that all cryptocurrency investors should look into adding to their portfolio.

  4. great article/ read Gail — there is so much more again to put into perspective as trying to learn just the basics in this highly volatile and so being highly moving arena is more than just a blog read or two –there is a ton of information and therefore a mountain of time used wisely to learn and then benefit possibly from the information and arena —

  5. This year I took an economics class and we briefly went over the different between centralized and uncentralized currencies and the overall view of central coins. Before this article I did not know stable coins were different from cryptocurrencies in the fact that stable coins retain their value. This is appealing for businesses because they will be more likely to accept these coins knowing that they can convert these smart coins into regular fiat if necessary.

  6. Difficult to trust some of them.
    Tether for instance, who claimed that it will always be worth $1.00, maintaining $1.00 in reserves for each tether issued.
    But then last year Tether Limited’s own lawyer claimed that each tether was backed up, but only by $0.74 in cash and cash equivalents.
    A good reputation is very important these days!

  7. I think stable coins will definitely bridge the gap between fiat and cryptocurrency, but agree that stable coins should not have a place in the cryptocurrency market. The whole beauty of cryptocurrencies is that it is decentralized! If a coin is centralized, then it has the chance to inflate along with fiat (defeating the beauty of crypto). I think stable coins entice non-crypto users to start using crypto, but I do not see it as having a big place in the crypto world.

  8. This was a genuinely nice review of stable coins. The naysayers of crypto inherently harp on the poor liquidity and lack of mass adoption and/or use of crypto. As we approach mass adoption and integrate the institutional big boy hedge funds and private equity funds that potentially could add a share of crypto to their portfolios as the Volcker rule is currently being asked to be discussed for changes. The potential discussion of lifting or revising the VOLCKER rule and Rule 203-1 which limits these institutional whales from entering the crypto arena would be huge for BTC and Compumatrix. These fiat whales are sitting on mega fiat dollars to hedge against the volatility and the potential bear equity market resulting from quantitative easing and US market concerns over the looming second wave of Covid-19. A potential lift or change in the rule would cater to a major upswing for BTC. Forbes quoted last week that a 1% BTC allocation could swing BTC’s market value to over 1 trillion dollars. Forbes writer goes on to quote that this 1% institutional allocation would make each BTC worth $50,000; up from the mere 9k to 10k side-ways trading we are seeing currently with BTC. HOLD ON TO YOUR HAT HODLERS.

  9. This is just what I needed to know, just when I needed to know it. I mean that I was just starting to read about stable coins a couple of weeks ago and I got distracted and side tracked. I meant to get back to my reading, but now instead of needing to go dig up my search history, very similar info has now been placed into my lap by way of this post on our very own Compumatrix Blog!

    1. Ask and ye shall receive! Or something like that. lol I’m glad the blog help and was something that you wanted to learn about Kevin. There are so many little paths and by-ways on this Crypto-road and each one is so interesting to go down. You never know what you will find on those avenues but I have never found it boring for sure!!

  10. Thank you for this informational blog! I thought I knew what a Smart Coin was, but I found out I did not! I am beginning to understand the more I learn, the more I need to learn. It is a fun experience though, and there’s never a dull moment. I can’t wait to read more of these blogs and learn more about what I don’t know.

  11. For some it is hard to break a habit, in this case, to still depend on fiat currency like USD, EUR, CRC current value. They argue that BTC is too volatile, that it can drop xx % in a day.
    I like stable coin solution only and if the coins are truly pegged to what they claimed to be.
    Thank you, Gail, once again

  12. I am learning and then learning some more — it does not stop but I have to admit having bitcoin at $50K would be an interesting and a few other things I am sure but imagine how the crypto world would be if $50K was where BTC was — also just think a bit about stable coins smart coins ?? and where each fits in to where we are right at this immediate moment because in all honesty thats really all that matters Right Now ?? rj

  13. One thing that is most definitely true about cryptocurrency…..you will never run out of material to learn. The problem is that with so many variables to learn within the topic of stable coins, you had best make some good, detailed notes to reference. Once you have determined the ones that have the most advantages or the ones that best fit your needs, you can back up and focus on learning a much smaller pile of information.

    1. So very true William, with Cryptocurrencies and the ecosystem changing daily and almost hourly, there is never a shortage of anything to learn. But, what an exciting trip it is to challenge our minds and grow our wallets!! I can’t imagine being in a better company which has proven itself to me many times over. Anyone would be hard-pressed to find a company that has had the problems that Compumatrix has had and yet, they are still here and fighting to improve all our lives.

  14. Just by reading about Stable coins, it gives one a feeling of certain “security” . That we could hope for certain stability, when using stable coins. The list is very big and Gail has done very well to educate us about them .Hopefully , it will be very convenient to deal with these coins. Thank you, Gail.

  15. it is a very real and legit look at what could be and what will be — i agree so much with the fact that this arena is so very volatile and literally there is so much added at every turn and the barriers or walls are moved constantly and the information you think you have today at this moment 4 hours from may very well be different and unfortunately may be obsolete — so You must stay current and stay very aware — jmho –rj

  16. Thank you Gail for a very informative article. Cryptocurrency is still new in a way and is so much to learn about it. I wasn’t aware of these types of coins and the difference in how they differ from each other. Thank you for opening my eyes to see and broaden my knowledge. This is wonderful to be able to learn, as crypto is the future money as they say it. I still have a long way to go … will walk with open mind, eyes and ears 🙂 cjs.

  17. I never gave much thought Stable coins and didn’t know much about how they worked or what they were even. This blog has certainly enlightened me, and I understand now! Stable coins, I believe, will help tremendously in mass adoption also of the regular cryptocurrencies. I see positive things coming from mass adoption and worldwide usage of cryptos in general!

  18. Another great blog and one I will print out and keep on file. I enjoy learning more and more about Cryptos and understanding what my business is and where it’s going. As the networks grow and newer and bolder information released, we, out of necessity, have to read to keep our minds refreshed on the latest.

  19. so very true Michael — as each day goes and more information and opinions are studied the fact that change is inevitable is also true — however as we study the different aspects of the Crypto world with all the parts ever-changing — i have to admit I like the underlying aspect of decentralized and not being pegged to some fiat currency — But I believe the powers that be will make that almost impossible as time moves forward — but it would still be nice to see BTC at $50K per at least for a while — rj

  20. It kind of baffles me on why stable coins even exist? Cryptocurrency was made to be not controlled by the government – decentralized. Period. End of story. I see stable coins as just purely like an online bank/currency that is controlled by the government. Almost like a credit card because essentially one stable coin would equal one USD.

  21. i am not sure if I have this correct but it appears that stable coins are a necessity in the decentralized world of the Crypto universe — and by having stable coins perse’ you also have the avenue at this point to traverse from the unregulated world of crypto currencies to the accessible world of fiat currencies — its almost like we can’t have one without the other ?? don’t know if right or not but it appears that this is part of the process ??

  22. Well times blog sophye. In a current world of uneasiness and no trust, just how can anyone trust the cyrpto world trust if there is not something solid to wrap your mind around. And if there is a stable coin or two out there and they are tied to something we already know and trust then it gives a bit of peace to the common person!
    The fact that we now also have a decentralized stable coin shows that the cryptocurrencies are going to be just as solid and robust as any currency system on Earth is now! So alleluia, we have come of age, and I do believe we are in for a few more advancements way beyond current systems!!

  23. keep reading and learning and then come back to some of these postings and add to my understanding — the stable coins do have a grasp of and the volatility in global markets and honestly not just because of the global virus — but all over the globe there is uncertainty and possibly that is a good thing OR is it a negative ???

  24. Gail, this is a very valuable blog about stable coin! Stable coin is a type of cryptocurrency, whose exchange rates are fixed,this blog needs to be read again and again because it contains a very valuable store of information,by the way, all your blogs are a treasure of information.

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