What are Stablecoins

What are Stablecoins?

A stablecoin is just another cryptocurrency, but with one essential difference – stability. The majority of stablecoins are pegged to fiat currencies like the dollar or euro. Some stablecoins are pegged to commodities like gold or silver.

Unlike other cryptocurrencies that can swing vigorously, a stablecoin is always stable in price, hence the name. If you want to save the value of cryptocurrency in your portfolio, now you can convert cryptocurrency to stablecoins, instead of converting to fiat. A stablecoin mimics the stability of fiat. If you are a cryptocurrency trader, you know how important stablecoins are. Stablecoins can save the value of your portfolio, especially during bear markets.

It is not just the traders that benefit from stablecoins. If you are a business that accepts cryptocurrency as payment but worried about the fluctuations in crypto prices, you can now transact with stablecoins. By doing this, you will have all the advantages of using cryptocurrency, plus the added benefit of stability.

Stablecoins are getting a lot of attention these days. Some of the big institutions and banks are taking steps to create their own stablecoin. One such example is the JPM coin by JP Morgan.

Another example is the “Libra” cryptocurrency developed by Facebook. It is governed by a consortium that includes MasterCard, Visa, and PayPal. Libra is collateralized by a basket of fiat currencies.

It is not just the institutions and tech giants that want to create Stablecoins. Even governments contemplate on the idea of Stablecoins. Digital dollar, digital Yuan, and digital Euro are in the pipeline. When these projects finally complete, cryptocurrency will surge in price.

All Stablecoins created today, fall into 1 in 3 categories. These 3 categories of Stablecoins are:

  1. Centralized Stablecoins
  2. Decentralized Stablecoins
  3. Algorithmic Stablecoins

Centralized Stablecoins

As of today, this is the most common type of Stablecoin. This type of Stablecoin is backed 1:1 by fiat currencies like Dollar, Euro, or Yuan. A centralized Stablecoin is governed and controlled by a central organization, hence the name. The central organization that controls the Stablecoin can be a bank, institution, or a government.

Decentralized Stablecoins

Arguably the best type of Stablecoin in the crypto world. This type of stablecoin is not governed or controlled by any organization; instead, it is governed by the participants in the network. Users of Stablecoins of this type, lock up a certain amount of cryptocurrency as collateral when borrowing Stablecoins, which are pegged to fiat currencies. One of the main features of cryptocurrency is its decentralized way of doing things. The lack of a central organization to control Stablecoins makes it really attractive.

Algorithmic Stablecoins

Relatively new type of Stablecoin that relies on algorithms to remain stable. There is no central organization that governs or controls this type of Stablecoin. Algorithmic Stablecoins do not have any collateral backing their coin. The way algorithmic Stablecoins stay stable is by expanding and contracting the coin’s circulating supply. If the price of the stablecoin increases, the system will release more coins, devaluing the coin. On the other hand, if the price decreases, the algorithm will reduce the coins in supply, increasing the value of the coin.

What are the Best Stablecoins?

Today, there are so many Stablecoins to choose from. However, some coins clearly stand out from the rest. So, here are some of the best Stablecoins as of today:

Tether (USDT)

tetherTether is the most popular and the biggest Stablecoin as of now. It is a centralized cryptocurrency backed by the US Dollar in a 1:1 ratio. This means that 1 Tether is equal to 1 USD. At the time of writing, Tether is the 4th biggest cryptocurrency in terms of market cap, with a market capitalization of 6.4 billion.

True USD

true usd coinTrue USD is another Stablecoin that is backed by the US Dollar in a ratio of 1:1. What is great about True USD is that its token holders are provided with regular attestations. US Dollars are held in bank accounts of multiple trust companies that have signed escrow agreements. Unlike other Stablecoins, collateralized holdings are not centralized in one entity, rather it is collateralized by multiple entities. True USD holders are provided with regular attestations of escrowed balances and these are subject to monthly audits. True USD tokens are based on the Ethereum blockchain.

MakerDao (DAI)

MakerDao (DAI)MakerDao takes a new approach to make a Stablecoin. Unlike traditional Stablecoins, DAI is not pegged to fiat currencies; instead, it is backed by Ethereum. MakerDao is an autonomous, decentralized institution. MakerDao has faced some security issues in the past; however, this coin is slowly gaining traction. As many have pointed out, their model is not quite clear and not easily understood.

Paxos

paxos standardPaxos is a stablecoin released by the Paxos Trust Company. Paxos is fully backed with US Dollars. It is an ERC-20 token built on the Ethereum platform. After registering at paxos.com and completing KYC, users can redeem PAX tokens for US Dollars in a ratio of 1:1. When you redeem, PAX tokens are immediately burned. Paxos is also registered and approved by the New York State Department of Financial Services.

Binance USD

BinanceBinance partnered with Paxos released a new Stablecoin in 2019, Binance USD. Binance USD is backed by US Dollars. It is also registered and approved by the New York State Department of Financial Services. Binance USD has a market cap of 179 Billion, at the time of writing.

You can check out the full list of Stablecoins here.

Conclusion

The purpose of any Stablecoin is to mimic stability. In times where cryptocurrency is highly volatile, one can easily hedge his portfolio without cashing out to fiat. The importance of a stablecoin is prominent, especially in the bear markets.

Signup to our Newsletter

Get exclusive Crypto tips & tricks