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Short Abstracts
- Stablecoins are cryptocurrencies with a fixed or stable exchange rate.
- They are a universal unit of account, convenient for trading, storing capital and protecting an investment portfolio from cryptocurrency volatility.
- Stable coins can have different sources and assets as collateral.
- There are two types of stablcoins: centralized and algorithmic, each with its own advantages and disadvantages.
What are stabelcoins used for?
Popular stablecoins are a liquid asset: they are available in large quantities on almost any platform.
Popular Stablecoins are also a universal unit of exchange and capital storage among crypto investors and traders. They are easier to trade in pairs with other cryptocurrencies than with fiat currencies. Unlike fiat, staplecoins are faster and easier to transfer between accounts and addresses.
In addition, stabelcoins are a safeguard against volatility in a cryptocurrency portfolio and are actively used in DeFi applications.
What are some popular stablecoins?
There are hundreds of stablecoins on the cryptocurrency market. Here's a list of the top 10 stabelcoins based on capitalization size (CoinMarketCap data as of May 2022):
- Tether (USDT).
- USD Coin (USDC)
- Binance USD (BUSD)
- TerraUSD (UST)
- Dai (DAI)
- TrueUSD (TUSD)
- Pax Dollar (USDP)
- Fei USD (FEI)
- USDD (USDD)
- Magic Internet Money (MIM)
What assets are stabelcoins tied to?
The most common symbols in the cryptoindustry are stabelcoins, which are tied to the price of the dollar. The most famous example of such a coin is Tether (USDT). 1 USDT is equal to $1 and has minimal deviations from this price.
There are stable cryptocurrencies based on other currencies, such as Euro - Stasis Euro (EURS), or based on the Singapore dollar - XSGD.
You can also buy stabelcoins tied to the price of gold - in particular, PAX Gold (PAXG) and Tether Gold (XAUT). Unlike traditional gold-based instruments - such as ETFs - staplecoin issuers do not charge management fees, and cryptocurrency settlements are faster and cheaper.
What mechanisms are in place to support the price of stabelcoins?
Each Stablecoin has its own system which ensures its value, but in general several types can be distinguished. Mostly, stablecoins differ in two criteria: the class of assets in reserve, the reserve rate, and the way the price is held.
What are centralized stablcoins?
Most popular stablcoins are issued by centralized issuers. Each of them manages a fund that holds reserves of various assets and securities. The fund is regularly audited to verify that the stated size and composition of the fund is consistent with the actual fund.
Tether publishes the results of these reports on its website. There, it also presents the current composition of the reserves. As of early May, about 85% of the fund was in cash and commercial paper.
Stablecoin operators are entities incorporated in a major jurisdiction. The second most capitalized dollar-stablecoin, USDC, is run by a consortium of U.S. companies Circle and Coinbase. It controls reserves, mostly consisting of cash and short-term U.S. government bonds. The company that manages the BUSD coin reserves operates in New York State.
The issuer of the centralized stackcoin is responsible for its issuance - it increases or decreases the circulation of the coin depending on the amount of reserves in the collateral.
What are the advantages and disadvantages of centralized stablcoins?
On the one hand, centralized stablcoins are very stable because their price is 100% secured by assets with low volatility. In addition, they are liquid, meaning they are available on almost any cryptocurrency trading platform. Also, popular stabelcoins are convenient for mutual settlements and capital storage. They are convenient to place as a base currency in trading pairs on cryptocurrency exchanges.
On the other hand, centralization is a weakness of such coins. Any difficulties with the organization controlling the reserves, including claims from regulators and reporting manipulation, could cause problems for all Stablecoin holders. In addition, it is unclear exactly how a stablecoin operator might use reserves.
A prime example is USDT. In early 2019, the New York State Attorney's Office charged the Bitfinex exchange with using the capital of its affiliate Tether to compensate for its own loss of user funds. It was about $850 million, access to which the platform lost after their transfer to the Panamanian processing service Crypto Capital.
Bitfinex only repaid the main debt to Tether in early 2021 and soon settled the conflict with the authorities. At the same time, Tether was sued by investors, accusing the company of "illegal and deceptive" practices. In April 2022, the Crypto Capital defendant pleaded guilty to all counts, including a charge of "shadow banking."
What are algorithmic stablecoins?
Cryptocurrencies, rather than traditional instruments, provide stability for some stablecoins. Since the value of digital assets can fluctuate dramatically, ensuring 100% value becomes a challenge. One way to solve it is to implement a decentralized management system, as well as a special computer algorithm that maintains the value of the asset based on certain principles.
What kind of algorithmic stablcoins are there?
Excessive Redundancy
One way to ensure the stability of an algorithmic stablocoin is by over-reserving, where the amount of collateral exceeds the issuance of the token.
The most popular such stablcoin is Dai. It is a cryptocurrency that can be issued by any user using the MakerDAO protocol.
At the same time, he is obliged to block his cryptocurrencies as collateral, the value of which in dollar equivalent is more than 100% of the amount of DAI tokens issued in exchange. This is necessary to avoid the loss of full collateral when the price of cryptocurrencies drops sharply. If the ratio of collateral to the issued amount of coins falls below the norm, there is a forced liquidation of the user's position.
DAI is a really stable coin, but its obvious disadvantage is low capital efficiency due to too high collateral.
Native Coin Reservation
The creators of some stabelcoins have no control over the issuance - any user can issue them. The price is regulated by the actions of economic agents, not the actions of a centralized organization.
The most popular algorithmic stablcoin is UST of the Terra project. Its price is held by means of arbitrage operations of holders, that is, through the mechanism of supply and demand.
UST can be issued in the service Terra Station for an equivalent amount in native coins of the project - Terra (LUNA), and vice versa. When the price of UST exceeds $1, it becomes profitable for users to issue relatively expensive stabelcoins. This balances supply and demand, with the result that the price returns to the right level.
If the price of a stabelcoin is below $1, its holders can burn the stabelcoins to issue LUNA. Reduced supply creates a shortage, the price of the token rises until it reaches parity with the corresponding fiat currency.
UST has become a popular stabelcoin, in part due to its high yield in the Anchor protocol. The coin's capitalization rose from less than $3 billion in November 2021 to $18.7 billion by early May.
On the back of this success, some blockchain projects wanted to replicate the success of UST and issued their own staplecoins. In April 2022, the Near blockchain team introduced the USN token, which is managed by DAO. The Tron network launched USDD.
Unusual price-holding models also include Ampleforth (AMPL), Fei USD (FEI) and Frax Finance (FRAX).
How will stabelcoins evolve?
Stablecoins are regularly criticized by regulators and government agencies.
In late 2021, the U.S. Treasury Department issued a report on the risks of stablecoins, noting the opacity of their reserves and assessing them as a threat to investors. The Fed believes stablecoins pose a risk because of possible problems with their conversion into fiat. Incidents like the UST depreciation will likely only hasten the introduction of stricter regulation of stablcoins.
Tether Technical Director Paolo Ardoino believes that algorithmic stablcoins are dangerous for the cryptocurrency market because they can cause a "cascading effect.
Keep your nose to the wind and know that Fortune, Luck and Success always favor you when you are with us!
Always yours C.J.
All the above is not financial advice, but only a subjective opinion of the author. If you doubt something, do your own research and double-check the information yourself.
