A stablecoin is a type of cryptocurrency that is “pegged” to another currency, usually the US dollar, in order to create a safe haven from volatility within crypto. As boring as that may sound, stablecoins are incredibly useful, and constitute a large section of the cryptocurrency market which is expected to grow in a big way as time goes on.
The use cases for stablecoins are extensive. One major use case is as a safe haven for finances of those living in developing countries with issues such as high inflation. Counverting funds into cryptocurrency pegged to the US Dollar can prevent a person’s life savings from being destroyed by local economic issues.
There are different types of stablecoin in existence, with some backing up their promise of a $1 coin with actual US Dollars in a 1:1 ratio, and others backing up this promise with reserves of cryptocurrency. The implementation of a stablecoin backed algorithmically by cryptocurrency can be tricky to get right, as the terra capitulation showed us.
Terra is a prime example of why we should know about the stablecoins that we sideline our money into. Losing money from a stablecoin is particularly painful as we consider money swapped to stablecoins as safe and out of the market. For this reason the terra collapse absolutely ruined many investors who did not even consider their money to be invested or at risk. I say again, know your stablecoins!
Circle/USDC
$USDC is in my opinion the safest option when it comes to stablecoins. The currency is created by Circle, a company extremely well funded by Venture Capital. $50m of that VC funding was obtained by Goldman Sachs in the early days of Circle. Today the company has a plethora of different partners including Visa, Mastercard and Coinbase, and has been involved in large business deals such as the acquisition of the poloniex centralised exchange. It appears that all is well for Circle, and that it is a strong, thriving company, which makes me a little more willing to park my money in their coin.
Circle is a global financial technology firm that’s at the center of digital currency innovation and open financial infrastructure. We bridge the traditional financial system and the world’s leading public blockchains to unlock growth for businesses and investors around the world.
Circle Website
“Trust and transparency” are the words that jump out when you visit their web page, hopefully that will remain the case for a long time to come. The currency is backed up by massive reserves of actual US Dollars, and this is where the trust comes from. The transparency comes from monthly audits of those those reserves by Grant Thornton, with the reports being published in the public domain on the Circle website.
Of course, as with most things, especially crypto things, there are some trade offs. The major one being decentralization. On the surface, being an ERC-20 token on the ethereum platform, $USDC may appear decentralized, but the fact of the matter is that those reserves of dollar bills are sitting in a bank somewhere (hopefully not in some form of fractional reserve loophole state).
This lack of decentralization may be a deal breaker for those of you who are idealists. The tornado cash debacle has highlighted the fact that Circle can blacklist accounts and freeze funds. Allegedly.
Personally I can’t see myself breaking any rules that would put me on that blacklist, but it is disconcerting. The crypto dream is permissionless, trustless transactions, and if this centralization turns you off I completely get it.
Maker/DAI
Enter DAI, a stablecoin backed by cryptocurrency. Governed by MakerDAO, an autonomous group of $MAKER holders, DAI is a stablecoin created with decentralization in mind.
As one of largest dApps on the Ethereum blockchain, Maker Protocol was originally developed by a group of contributors including developers inside the Maker Foundation, outside partners and “other persons and entities”. Maker Protocol was the first Defi Protocol to see significant adoption, and is now managed by people around the world that are part of MakerDAO, as a result of holding $MKR.
MakerDAO functions through a system of “scientific governance” which involves Executive Voting & Governance Polling. One MKR token locked in a voting contract equals one vote in the DAO.
MKR holders govern the Protocol and the financial risks of Dai to ensure its stability, transparency, and efficiency.
MakerDAO Whitepaper
Every DAI in circulation is directly backed by excess collateral, meaning that a reserve of crypto assets exists, ready to pay out for every single DAI token. The value of DAI collateral remains higher than DAI debt, and all transactions are transparently viewable on the blockchain.
In order for DAI to be generated, any form of Ethereum based asset that has been approved by MakerDAO can be accepted. MakerDAO must also approve “specific, corresponding risk parameters” for each accepted collateral, meaning riskier assets may be given a tighter risk parameter.
A full rundown of how DAI is governed is available in the whitepaper, where vaults and other price stability mechanisms are outlined.
Tether
Launched in 2014 by “Bitcoin enthusiasts”, Tether has been around for a while, and is one of the top stablecoins available on the crypto market. Similarly to USDC, Tether is backed by fiat currency on a 1-1 basis, which is 100% present in tethers reserves. According to Tether “the reserves match or exceed the amount required to redeem all Tether tokens in circulation”.
Whether or not this statement is actually true has been called into question. A lack of transparency has created doubt amongst the general public as to whether or not Tether can actually back up their debt with cash reserves, and this stands in stark contrast to the publicly audited accounts of USDC. Tether themselves even stated at one point that only 2.5% of their reserves were sitting in liquid cash. Right now, Tether is sitting pretty as the #3 ranked cryptocurrency in the world, with a $69B valuation.
This large valuation is what has people so concerned about the lack of transparency. In the event of a “bank run” type scenario, where a large amount of Tether investors asked for their dollars back at once, Tether may not be able to fulfil investors requests. Given the size of Tether as a percentage of the market, such a scenario could cause problems across the space as a whole, and could potentially crash the price of coins such as Bitcoin and Ethereum.
In case you are sceptical, the notion of a stablecoin collapsing is not that far fetched, just ask the founder of $UST. Of course we all hope that Tether never collapses, but $69B (and growing), is an awful lot of money to have to back up.
Binance USD
BUSD is a stablecoin issued by Binance in partnership with Paxos, which is a blockchain infrastructure platform operating out of New York.
The stable coin is linked to the Binance cryptocurrency exchange, and has a current market cap of $22.5B. With 5.5M holders of the coin, there is a well established user base. It is currently the #7 ranked cryptocurrency globally.
Similarly to USDC, and in contrast to Tether, BUSD is transparent in their reserve holdings, with monthly audits available for viewing on the Binance website. According to Binance, BUSD is fully regulated by a primary prudential regulator, the New York State Department of Financial Services (NYDFS). According to Binance customers will be returned the dollars that they are owed even in the event of insolvency.
With fully segregated bankruptcy-remote accounts, assets held in custody would be returned to their rightful owners even if the custodial trust became insolvent.
BUSD Webpage
BUSD is easily obtainable, and can be bought across multiple blockchains, through over thirty different exchanges.
Pax Dollar
Another offering of Paxos, USDP calls itself “the world’s leading regulated stablecoin”. There are those in the crypto space that are anti regulation in any form, but for those storing their money in a stablecoin that needs to be backed by reserves, such regulation may come as some comfort.
The claim by Paxos is that their coin offers “unparalleled assurance to customers that their USDP is backed on-to-one by the dollar. The coin has $21B issuance currently. Reserves are held 100% in cash.
Reserves are held 100% in cash and US treasuries, meaning that customer funds are always available for 1:1 redemption.
Paxos Website
True USD
TrueUSD operates in conjunction with TrustToken, with TrustToken supporting in operations, compliance and banking relations. Launched in 2018, the coin has already hit an impressive number of milestones, and currently boasts a marketcap of $800M. Although smaller than the other stablecoins on the list, it is growing steadily.
Attestations are provided in real time by TrustExplorer. In this way TrueUSD provides a high level of transparency.
The coin has a number of high profile connections listed on its website such as Google, Airbnb and Coinbase. Available on 70+ major exchanges, including larger exchanges such as Binance, the coin is easily obtained. TrueUSD is also available on 20+ Defi platforms across multiple blockchains.
There are also high staking returns to be had with TrueUSD, with crypto.com for example offering 12% returns for staking your coins on the platform.
