- Stablecoins are cryptocurrencies "pegged" to fiat currency.
- They can be used as stores of value or units of account, as well as in other use cases where volatile cryptocurrencies may be less desirable.
Since their inception, cryptocurrencies have been considered particularly volatile investment instruments when it comes to their price. This has led to price spikes and crashes, in some cases preventing cryptocurrencies from being used for everyday goods and services because of the risks to suppliers and merchants.
This is where stablecoins come in. The theory is that if you create a currency that is "pegged" or pegged to a common fiat currency like the US dollar or something else with a relatively stable price, it will prevent price fluctuations.
We explore them in more detail below.
What is a stablecoin?
Stablecoins are cryptocurrencies that are supposedly backed by fiat currencies — dollars, pounds, shekels, rubles, etc.
The idea is that, unlike Bitcoin, the prices of stablecoins remain stable regardless of which fiat currency is backing them.
Stablecoins are used as stores of value or units of account, as well as in other use cases where unstable cryptocurrencies may be less desirable. Different stablecoins use different strategies to achieve price stability; some are centralized, and others are decentralized.
What are some examples of stablecoins?
💵 Tether (USDT): Tether is one of the first and most famous stablecoins. It claims to be backed by a reserve of real dollars — “collateralized” — that is, “off the grid,” meaning in a physical location controlled by a centralized third party.
With this stash in the bank's vault, investors can be confident that their cables are actually worth one dollar each, keeping the price stable. Stablecoin accounts for a whopping 48% of all cryptocurrency trading volume. There's just one problem: Tether Ltd, which mints Tether tokens, has never proven conclusively that the currency is truly fully secured, fueling doubts among investors. (More on this below)
💰 Gemini Dollar (GUSD)/Paxos Dollar (PAX)/USDC: Developed by venture capitalists the Winklevoss twins, blockchain startup Paxos, and crypto exchange Coinbase (together with payments platform Circle), respectively, these stablecoins are favored by institutional investors — all of which have been thoroughly vetted by Wall Street firms and comply with local regulatory regimes. As Tether becomes less reliable, these tokens only become more popular.
(EMOJI): Filecoin (oneFIL): An ICHI-developed protocol for creating "decentralized monetary authorities", oneFIL is the stablecoin for the Filecoin network. It is backed by USDC and Filecoin's native coin, FIL. Its purpose is to provide a stablecoin for the wider development of the Filecoin network, and it also provides incentives and discounts for buyers and providers of Filecoin storage.
While the vast majority of stablecoins are backed by US dollars held in bank vaults, the weakening sentiment around the US dollar and fiat currency, in general, has led to the development of stablecoins backed by other assets, including various gold-backed cryptocurrencies. They vary greatly in form and ease of use, but all are backed by investment gold.
CACHE gold (CACHE) is one of the most popular of them. Each CACHE is backed by 1g of pure gold stored in vaults around the world. Sending CACHE tokens is equivalent to sending 1g of gold per token as they can be easily exchanged for physical gold at any time.
There's also Tether Gold (XAUt) and PAX Gold (PAXG), which work in a similar way, but instead are pegged to one troy ounce of investment gold. They also have a higher minimum redemption amount than CACHE.
Terra (LUNA) is a decentralized stablecoin, meaning that instead of relying on a trusted third party, it uses a complex algorithm to maintain stability. To do this, it automatically balances "on-chain" reserves, i.e. funds stored in smart contracts, with supply and demand, reducing the likelihood that traders will accidentally or intentionally go over the price.
Amplefort (AMPL) relies on a similar process. Instead of physically backing each AMPL with $1, it instead uses a process known as "rebasing" to automatically adjust the circulating supply of the cryptocurrency in response to changes in supply and demand. If the price of AMPL is more than 5% above or below the base price in US dollars, it will increase or decrease the supply in circulation in an attempt to push the price to $1. Since this rebasing is proportional to all wallets, AMPL holders always retain their stake in the overall AMPL network.
Dai (DAI) is said to stand out from other competing stablecoins because it can be widely used while remaining decentralized and trustless. DAI, which was created by the blockchain company MakerDAO, is an ERC20 token whose value is pegged to the US dollar and can be used for transfers between Ethereum wallets.
Complete list of popular stablecoins
Pegged to the US dollar
- Tether (USDT)
- True US Dollars (TUSD)
- Gemini Dollar (GUSD)
- United States Dollar Coin (USDC)
- Paxos Standard (PAX)
- Binance USD (BUSD)
- sUSD (SUSD)
- mStable USD (MUSD)
- Ampleforth (AMPL) (algorithmic)
Pegged to GBP
- Binance Stablecoin GBP (BGBP)
Tied to the euro
Tied to KRW
- CACHE Gold
- Tether Gold (XAUt)
- Paxos Gold (PAXG)
- Petro (PTR) (petroleum coated)
- Scales (with basket)
How are stablecoins used?
Like most digital assets, stablecoins are primarily used as a store of value and medium of exchange. They give traders a temporary reprieve from volatility when the market falls, and can be used in the fast-growing world of decentralized finance (DeFi) for things like increasing yields, lending, and providing liquidity.
Most traders and investors gain access to stablecoins by purchasing them on exchange platforms, but it is also often possible to mint new stablecoins by depositing the required collateral with the issuing company, such as US dollars with Tether or physical gold with CACHE gold.
Why have stablecoins become so popular?
Stablecoins are extremely popular: Tether, for example, is the second most traded cryptocurrency after Bitcoin, with a 24-hour trading volume of over $70 billion (at the time of writing).
Why do people choose stablecoins over cryptocurrencies like Bitcoin
They are (relatively) stable. Because they are supposedly backed by fiat currency, investors can rest assured that their tokens will always sell for one dollar each. This ostensibly means that prices will not fall: coin prices are driven by belief, so if investors believe their stablecoins are worth and backed by one dollar each, the price should reflect that.
They are a safe haven for worried investors. Many exchanges — including Binance, the world's largest — don't allow traders to buy fiat currency, only allowing them to buy and sell cryptocurrencies. This means that it is often difficult for investors to quickly cash out their cryptocurrencies when the going gets tough. To do this, they may have to transfer through several exchanges or even wait a few days.
This is where stablecoins come in. Since they are cryptocurrencies, they live on most exchanges. However, as they achieve the value of a single fiat currency, they act as a kind of temporary haven for investors who want to protect their funds during a bear market. In this way, stablecoins are like blockchain-enabled versions of the dollar. That is if they retain their value.
Disadvantages of stablecoins
Investors need proof that coins are backed by reserves. In the case of Tether, this was never definitively granted, leading to rumors that the currency was not backed up and was effectively minted out of thin air.
Stablecoins are not necessarily stable. The Gemini dollar has rallied a few cents several times over the past year as traders poured money into it. Ironically, many of these investors' funds came from Tether, which had previously fallen to $0.51 on some exchanges. As such, stablecoins can be considered "relatively" stable rather than absolutely stable, especially when compared to volatile assets like Bitcoin.
Tether has consistently claimed that it is actually 100% backed by the US dollar, but when Tether released a breakdown of its reserves in May—for the first time in seven years—it turned out that less than 3% of Tethers were actually backed. in cash.
American lawmakers are also not in favor of stablecoins in general. In his semiannual monetary policy report to Congress earlier this month, Federal Reserve Chairman Jerome Powell said stablecoins need tighter regulation.
"If they're going to be a big part of the payments universe, as we don't think crypto assets will be, but stablecoins might be, then we need the proper regulatory framework, which, frankly, we don't have," he said. . In July 2021, President Biden's Treasury Secretary Janet Yellen met with top regulators to "discuss interagency work" around stablecoins, with Secretary Yellen urging regulators to "act quickly to ensure that the appropriate regulatory framework is in place in the US."
In the same month, China's central bank, the People's Bank of China (PBoC), sounded the alarm about stablecoins, with PBoC Vice Chairman Fan Yifei saying that global commercial entity stablecoins "may pose risks and challenges to the international monetary system, and the payment and settlement system.". Yifei added that Chinese authorities are "very concerned about this problem" and have taken unspecified measures.
The future of stablecoins
With the crypto boom of 2017 behind us, investors are increasingly turning to stablecoins as a safer way to experiment with the technology. In the first half of 2020, the supply of stablecoins increased by 94% and reached $11 billion in June. And the regulators are also suitable for them; in September 2020, the US Office of the Comptroller of the Currency (OCC) gave national banks and federal savings associations the green light to hold reserves for stablecoin issuers.
As more respectable players add their weight (such as the Winklevoss twins, Circle, and Coinbase), the idea of a digital dollar, a shadow currency that accepts fiat on the blockchain without risking its value, becomes increasingly enticing.