The biggest crypto explosion caused by TerraUSD’s demise, which resulted in a loss of over $40 billion, has sparked a heated debate among policymakers and the crypto community.
Consequently, the US House of Representatives has recently tabled a bill to ban stablecoins for two years. The prohibition is recommended in order for regulatory agencies to research endogenously collateralized tokens.
Also, In the first week of September, Binance officially announced the conversion of three stablecoins, USDC, USDP(Pax dollar), and TUSD(True USD), into its native stablecoin BUSD. The move came in to enhance liquidity and capital efficiency for Binance users.
A lot is happening on the stablecoin side of the crypto market.
In the upcoming blog post, let’s analyze what stablecoins are, their pros and cons, and what could have gone wrong with them.
So, Let’s Begin!
What are Stablecoins?
An alternative to the extremely volatile crypto universe, stablecoins are reliable, scalable, and secure crypto assets.
They are digital entities pegged to another currency or asset, typically fiat, though there are a few other kinds of stablecoins as well, including algorithmic stablecoin, gold-pegged, and more.
Stablecoins are intended for long-term price stability and are tethered to the value of an underlying asset, such as the US dollar. They strive to avoid extreme volatility while offering all the merits of cryptocurrencies.
Characteristics of Stablecoins:
- Minimize volatility
Stablecoins are protected from the volatility experienced by the decentralized financial system since they are backed by stable currencies or assets.
- Enhanced involvement with Defi
Volatility is a significant barrier keeping investors out of the decentralized market. Stablecoins have the potential to boost investor confidence.
- Energy efficiency
Stablecoins provide lower energy use while increasing transaction throughput.
- Easy mining
Miners do not need advanced mining techniques for gold or stablecoins backed by currencies.
- Fiat-Crypto Integration
Using a stablecoin like USDC, digital assets listed on crypto-exchange platforms can be valued in fiat money.
Types of Stablecoins:
Stablecoins come in a variety of forms and offer a number of advantages. The stablecoin made available in the Defi universe can be categorized under two broad heads:
Collateralized stablecoins keep a pool of collateral as a reserve to back up the coin’s value. An equivalent quantity of the collateralizing assets is withdrawn from the reserves when a stablecoin holder wants to cash out their tokens.
Following are the different types of collateralized stablecoins:
- Stablecoins with a backing in a commodity, such as gold or precious stones.
- Fiat-collateralized: The most common form of stablecoin, where the tokens are pegged against fiat currency, most popularly USD. BUSD, USTD, USDC, etc., are examples of fiat-backed stablecoins.
- Crypto-collateralized: They have other cryptocurrencies as their backers. Such stablecoins are over-collateralized because the reserve cryptocurrency may likewise be prone to extreme volatility.
The most scrutinized of all stablecoins where the stability of the tokens is ensured by an algorithm, essentially a code controlling the price volatility.
They are supported by an on-chain mechanism that enables a shift in the supply and demand between the stablecoin and the linking cryptocurrency.
The value of algorithmic stablecoins is often unbacked by independent assets in reserves, which makes them undercollateralized. In reality, the terms “algorithmic stablecoins” and “undercollateralized stablecoins” are frequently used synonymously.
TerraUSD, the most popular and now extinct algorithmic stablecoin, brought much attention to this area of the crypto-sphere.
The largest algorithmic stablecoin, TerraUSD (UST), peaked on May 5 at a market cap of more than $18.7 billion before rapidly declining after falling below its peg, causing billions of dollars of loss to the crypto market.
Recommended: Stablecoin Smart Contract Audit
Pros and Cons of Stablecoin
Pros of Stablecoins
- low price turbulence
- Allow investors to access the crypto market more quickly and easily by converting money into stablecoins, which operate like fiat currencies on crypto exchanges.
- It can be used to protect against inflation
Cons of Stablecoins
- Centralized tendency
- Nil cost appreciation
- Not immune to fiat or other asset inflation
We hope now you have a fair understanding of stablecoins in general. Let’s talk about some of the prominent stablecoins in the crypto market today.
Prominent examples of Stablecoins
USDT, USDC, DAI, and BUSD are the four stablecoins repeatedly featuring amongst the top crypto coins in the market today.
USD Coin (USDC) is a perfect illustration of a collateralized stablecoin, holding reserves in safe assets, namely, cash and U.S. Treasurys.
USDC’s market valuation fell when its issuer, Circle, elected to freeze over 75,000 USDC tokens held linked to Tornado Cash addresses.
USDC came in as a digital dollar having worldwide reachability, but volatile market conditions, increased scrutiny by the regulatory agencies, and a few other reasons led to the downfall of the stablecoin.
Tether(USDT) is the most widely used and oldest stablecoin. After Bitcoin and Ethereum, USDT is the third-largest cryptocurrency at the moment based on its market cap. However, it has long faced criticism regarding the dependability of its reserves.
There have been doubts regarding the maintenance of sufficient reserves in consonance with the Tether tokens in circulation. Although the organization maintains its stance on an adequate reserve pool, the uncertainty had some impact on its image.
The native stablecoin of the world’s largest cryptocurrency exchange Binance currently features among the top 10 cryptocurrencies.
BUSD functions as a virtual equivalent of the U.S. dollar and is set to the same value. The three main benefits of BUSD are speed, adaptability, and accessibility. With Paxos or Binance, getting the token is simple.
DAI is a stablecoin of MakerDAO, having crypto collateral, soft pegged to the U.S. dollar. A smart contract on the Ethereum blockchain enabled the 2017 debut of DAI on the Maker Protocol. The goal of DAI was to provide a decentralized cryptocurrency that was not only available but also could be used as collateral for loans.
Although the price of stablecoins like USDC, USDT, BUSD, and other collateralized coins is less volatile than other cryptocurrencies, stablecoins may be subjected to more scrutiny from regulatory bodies like the U.S. Securities and Exchange Commission.