- Stablecoins are pegged to a given currency or commodity and usually tag along with its prices; thus should not deviate from the tagged asset’s value.
- There are different types of stablecoins depending on their mode of backing.
What are stablecoins?
Stablecoins are cryptocurrencies whose values are always pegged to that of another currency, commodity, or financial instrument. They are an alternative to the high volatility of other cryptocurrencies and fiat currencies, which may be hard to use digitally.
As such, stablecoins are better to use as a mode of exchange than highly volatile cryptocurrencies. They do not have to be tied to a currency like the U.S. dollar. They can be tied to commodities like gold too.
Types of stablecoins
Stablecoins differ according to the mode of backing. In that way, we currently have three types of stablecoins:
- Fiat-collateralized (backed by fiat money or physical commodities)
- Crypto collateralized (backed using other cryptocurrencies like BTC and ETH)
- Algorithmic (tied to the value of a commodity or a currency using an algorithm that controls how and when coins are burnt or minted to maintain their peg)
The market cap of stablecoins exceeds $127 billion, making them an essential part of a current $1T industry. There are many stablecoins in the market, but only a few could have reliability of 80%+. Here are the top six stablecoins by market capitalization
- Tether USDT – $83.28B
- USD Coin – $28.11B
- Dai- $4.6B
- Binance USD – $4.49B
- True USD – $2.01B
- Pax Dollar- $1B
What is Tether USDT?
Tether USDT is the world’s largest stablecoin by market capitalization. It is the most popular among crypto enthusiasts as it has been leveraged for years and pegged to the dollar. Both physical and crypto assets back it. USDT is minted and managed by its parent company, Tether.
What is USD Coin (USDC)
Like Tether USDT, USD Coin(USDC) is pegged to the U.S. Dollar. It is managed by its parent company Centre Consortium. This stablecoin is the world’s second-largest one and brags a liquid backing of 100% cash and cash equivalents.
What is Dai (DAI)
DAI is a dollar-pegged crypto asset on the Ethereum network. It is currently the third largest by market cap but has been crippled by depends severally. This stablecoin brags to be the world’s first decentralized, collateral-backed cryptocurrency. Unlike the USDT and USDC, it is algorithmic and was issued by MakerDAO.
What is Binance USD coin (BUSD)
Binance USD (BUSD) is a fiat-backed crypto asset pegged to the U.S. Dollar and issued by Paxos. It has reserves that are equal to customer deposits and are held in FDIC-insured U.S. Banks. However, it has been under pressure by U.S. regulators to wind up its operations and close for good.
What is True USD (TUSD)
True USD (TUSD) claims to be the first independently verified digital asset that equates to 1:1 for U.S. Dollars. It is a multichain stablecoin that uses traditional banks, escrow accounts, and third-party attestation in its operations to decrease counter-party risks, offer transparency and do away with fraud.
What is Pax Dollar (USDP)
USDP is a USD-pegged digital asset issued by Paxos. Unlike traditional banking, it aims to offer its users the ability to store and send money digitally in U.S. dollars in a free, unrestricted way. It is fully regulated and 100% backed by cash reserves.
Risks associated with stablecoins
There are different risks that are associated with holding stablecoins. Here are the two main ones
Stablecoins are known to lose their peg resulting in huge losses to their users. However, not all of them collapse for good. Some lose their peg momentarily, including the largest ones like Tether USDT.
Regulators, at times, are not in favor of assets that could weaken their economies. As such, lawmakers and regulators may rally to bring down all stablecoins pegged to their currencies in fear of the fiat currencies weakening. It has already happened in the U.S., where several lawmakers wanted stablecoins done with, and NYDIC asked Paxos to stop issuing BUSD.
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