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Stablecoins are a new generation of cryptocurrencies backed by stable underlying assets, such as real-world assets in fiat currency or on-chain tokens. approach allows stablecoins to combine the benefits of bitcoin, such as low fees, instant transactions, and complete anonymity, with price stability.
global market capitalization of stablecoins has recently exceeded $ 100 billion market capitalization, accounting for about 5% of the total cryptocurrency market capitalization of nearly $ 2 trillion. Furthermore, according to the latest Analytical Statistics report, the market-leading stablecoin Tether (USDT) recently achieved a monthly trading volume of $ 2.3 trillion, which is roughly 95% higher than that of bitcoin.
Stablecoins represent an escape from the huge volatility of the cryptocurrency market, as they are based on the blockchain and base their value on the US dollar or other stable assets. Thus, these cryptocurrencies solve the price fluctuation problems that make BTC impractical for day trading.
Some proponents of cryptocurrencies argue that stablecoins may be the best option to enable digital currency to scale in the traditional financial world.
Types of stablecoins in the cryptocurrency market today
Based on their design and underlying assets, stablecoins can be classified into three main categories. Stablecoins guaranteed by Fiat are the most common and simple version. se stablecoins are issued by a third party and are backed by a single fiat currency vault, making them essentially digital representations of legal tender.
Some stablecoins, like the upcoming Diem cooked up on Facebook, may be backed by a basket of different fiat currencies such as the euro, the yen, and the British pound. USDT and USDC are currently the leading fiat-backed stablecoins in circulation. Both currencies are pegged to the US dollar.
Crypto-backed stablecoins are different because they are backed by cryptocurrencies like BTC or ETH rather than fiat currency. market keeps these stablecoins always overcollateralized to protect against the volatility of the underlying cryptocurrencies.
third category is the unsecured stablecoin, which relies on algorithms to incentivize the market by increasing or reducing the circulating supply. software can also engrave tokens to keep the plug. se mechanisms help maintain the stability of the price of the stablecoin against the underlying currency, eliminating the need for collateral.
This article will focus on crypto-backed stablecoins backed by a combination of other digital asset pools.
How crypto-backed stablecoins work
Issuers of crypto-backed stablecoins avoid relying on government-issued offerings by backing their coins with a basket of other cryptocurrencies (for example, Ether). As a result, stablecoin traders hold stablecoins in an over-collateralized position, absorbing extreme swings in the underlying digital asset rates and keeping the price of the coin stable.
For example, cryptocurrency users must bet $ 200 of Ether on a smart contract to receive $ 100 of stablecoin. This means that stablecoins are guaranteed at 200%, which ensures that their price remains stable even if the value of the underlying collateral falls dramatically.
Additionally, issuers reduce single collateral volatility by spreading risk across multiple cryptocurrencies.
pros and cons
One of the benefits of crypto-backed stablecoins is their adherence to the core value of decentralization. Unlike fiat-backed stablecoins, such as USDT, issued by centralized business entities, this subset of stablecoins is free from middlemen, making it censorship-resistant and secure.
Each transaction is recorded on a distributed public ledger, allowing for unmatched accountability. Fiat-backed alternatives lack this quality, requiring the trust of a centralized entity that can sometimes break the rules.
For example, Tether supporters linked to cryptocurrency exchange Bitfinix have been in legal trouble with US financial watchdogs for lying about USD reserves in support of their USDT offerings.
Another obvious benefit of crypto-collateral stablecoins is the efficiency they offer users thanks to their fast on-chain settlement process. feature made this set of coins vital for PayPal and other private sector companies looking to transform digital payments.
trustworthy nature of these coins also creates leverage for trading, which is attractive to decentralized finance (DeFi) users.
On the other hand, overly guaranteed stablecoins have some drawbacks. Unlike fiat-backed stablecoins, which only require holding 1: 1 reserves in fiat currency, crypto-backed currencies must be overcollateralized, leading to inefficient use of collateral.
se stablecoins also have less stability than their fiat-backed counterparts, as the underlying crypto collateral is inherently prone to high volatility. re is also the risk of an instant liquidation if the market value of the crypto collateral falls below a certain threshold.
Most Popular Crypto Collateral Stable Coins Popular
Let’s take a look at 4 of the most common stablecoins that other cryptocurrencies use to maintain a stable value.
MakerDAO / DAI is an ERC 20 token that uses Ethereum to maintain stable value by offering instant transactions and transparency. Maker Protocol oversees the development and issuance of Dai.
Dai blocks excess ETH tokens and backs them up in smart contracts stored on a public blockchain, ensuring that the price remains stable. Smart contracts, as well as the MKR governance token, help monitor Dai’s price stability. This approach also enables Dai to maintain trust among users and avoid the level of regulatory scrutiny that fiat-currency-based cryptocurrencies like Tether face.
Since its launch in 2017, Dai has gained the most traction in the stablecoin world, enabling a wide range of blockchain-based services such as supply chain, loan markets, and forecasting.
Sucedió is a decentralized payment network that leverages Ethereum’s mainnet and a unique pair of tokens. “Havven” token acts as a floating token that gets stuck in a pool of collateral, while “Nomin” or USD is the decentralized stablecoin always pegged at $ 1.
project maintains user trust by ensuring that the number of Nomin tokens in circulation is constantly backed by a sufficient number of blocked Havven tokens using the platform’s escrow technology.
Synthetic started as a stablecoin project dubbed ‘Havven’ offering a native Havven (HAV) token. founders of the project initially intended to build a decentralized payments network that would leverage a dual token mechanism to issue a stablecoin (nUSD) backed by HAV tokens (now SNX).
protocol has evolved into a crypto-secured network that offers the $ sUSD stablecoin and facilitates over-secure synthetic on-chain assets that represent real-world assets. Additionally, Synthetix oracles track the price movement of these assets in the real world.
reserva offers a flexible pool of guaranteed hybrid tokens that allow people in hyperinflationary countries to move their money to a stable currency. platform’s native $ RSV tokens are stable digital currencies backed by crypto and fiat currencies. se stablecoins have a lot of use, including remittances and cross-border payments.
Like Dai, the project uses a decentralized governance token ($ RSR) to monitor and maintain the price stability of $ RSV.
Stablecoins launched on other blockchains
In recent years, many blockchain networks have chosen to issue their own versions of the market-leading USDT and USDC stablecoins.
Tron blockchain, led by CEO Justin Sun, was the first to issue the USDT stablecoin pegged to the dollar as a TRC20-USDT token in 2019. Additionally, the Tron Foundation partnered with Tether to launch USDT as a native token. on your blockchain. allowing users to easily transact with dApps and protocols based on the Tron network.
Tether reached a milestone last May by issuing 30 billion USDT overs on top of the Tron chain, surpassing the US $ 27 billion currently issued as ERC20 tokens. So far, the chain led by Justin Sun currently has four stablecoins in circulation, including TRC20-USDT, TRC20-USDJ TRC20-USDC, and TRC20-TUSD.
In February last year, Tether launched USDT on Algorand, offering PoS blockchain users better transaction scale and quick settlement. A few months later, Algorand widened support for USDC, a $ 25 billion stablecoin that quickly absorbed Tether’s 63 billion market cap.
In June 2021, the USDC CENTER administrator revealed plans to issue its stablecoin across multiple networks, including Kava, Polkadot, and Tron, potentially surpassing the eight blockchain networks that currently support USDT.
According to the latest news from the world of cryptocurrencies, the stablecoin USDC will soon be launched on Avalanche, a high-performance intelligent chain of contacts.
Final thoughts
Stablecoins hopes to emerge as the new currency that powers a digital economy by allowing anyone to bypass traditional financial companies and transact directly with their peers.
Crypto-backed stablecoins, in particular, have a unique advantage over yours. backed by fiat counterparts as they offer greater transparency and accountability. Furthermore, even crypto-backed stablecoins fully adhere to the principle of decentralization and are therefore resistant to interference from any centralized authority.
Wayne is a Blockchain enthusiast and cryptocurrency trading expert. Currently, he deals with trending topics in digital currencies.
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