Author: Chris Davis
Translation: Olivia
Cryptocurrency is notoriously unstable, so this factor reduces the participation of mainstream users and limits its use as an available exchange platform for goods and services. Among them, stable currency is a low-volatility version of cryptocurrency. In fact, reducing volatility can be achieved in a variety of ways, including supporting the token with stable assets.
Stablecoins are a very effective way for investors who want to keep their assets in the crypto space. The conversion from cryptocurrency to fiat currency is expensive and time-consuming, but stablecoins provide investors with the best of both worlds-stable assets in the crypto field and favorable transaction speeds.
Due to its relative stability, stablecoins are also easier to align with regulators. The Gemini Dollar (GUSD) and Paxos Standard (PAX) are two currencies approved by the New York State Department of Financial Services.
What is a stable currency?
A stablecoin is a cryptocurrency designed to limit investors’ volatility when using cryptographic technology. Stable coins are usually linked to another asset with stable value, but they may also be supported by algorithms.
When consumers buy or sell non-monetary goods and services, they may experience huge price changes during or after the transaction. Stablecoins make the competitive environment fair, without requiring any party to exchange currencies.
Stablecoins became popular after the craze in 2017. After Bitcoin rose to nearly $20,000 and then fell by more than 50%, investors began to look for a crypto-based store of value with less volatility. The success of cryptocurrencies prompted the Federal Reserve Board and other governments and central banks to announce investigations into their own digital coins.
Types of stablecoins
There are many kinds of stablecoins, which are mainly distinguished by the assets supporting the stablecoins. The following are the main types:
- Commodity-backed stablecoin
Commodity-backed stablecoins are stabilized with hard assets such as gold or real estate. The most commonly used asset as a guarantee for a stable currency is gold, although many people use a diverse basket of precious metals.
- Fiat-backed stablecoin
Stable currencies backed by legal currencies such as RMB hold reserve currencies as collateral. Other forms of currency include precious metals, such as platinum or silver, and commodities, such as corn or oil.
Most stable currencies supported by fiat currencies are backed by USD reserves. The currency reserve is managed by an independent custodian who will conduct regular audits to ensure compliance.
- Cryptocurrency-backed stablecoin
Cryptocurrencies can also support other cryptocurrencies. This is the case with stablecoins supported by cryptocurrencies. In order to offset the high relative volatility of supporting stablecoins through encryption technology, the coins will maintain an over-collateralized position.
In other words, compared with currencies backed by fiat currencies, the circulating supply and reserves of stablecoins will be much lower. For example, crypto-backed stablecoins may only issue $500 worth of coins for every $2,000 of crypto reserves, instead of maintaining a 1:1 ratio.
- Siegniorage style stablecoin
Siegniorage is managed and supported through algorithms or programs rather than other assets or currencies. The idea of siegniorage as an endorsement comes from a white paper by the famous cryptographer Robert Sams, who proposed the idea of a Federal Reserve currency (fedcoin) that can serve as such a function. Smart contracts deployed on decentralized platforms can act as autonomous “endorsers” of such currencies.
Currently the best stablecoin
Not all stablecoins are the same. With the increasing number of stablecoins, it is good to master the most useful and reliable choices. The following are currently the best stablecoins:
- Tether(USDT)
It is so named because it “binds” itself to the value of the US dollar. Tether is the most well-known stable currency in the crypto world. It is backed by gold, traditional currencies and cash equivalents. Tether is also known for its security and smooth integration with crypto-to-currency platforms.
- True USD(TUSD)
True USD (also known as “TrueUSD”) is 100% backed by the U.S. dollar and is the most liquid stable currency in the market. The transaction fee of this currency is lower than that of wire transfer, and the interest rate for storing the balance is higher. TrustToken, the company behind True USD, also has stablecoins linked to other major currencies-TrueAUD, TrueGBP, TrueHKD, and so on.
3. Paxos standard currency (PAX)
Paxos Standard’s goal is to maintain a 1:1 parity with the US dollar. It was created as a response to the Tether’s money printing controversy, and Tether has come under fire for unconfirmed claims that it holds $1.8 billion with Deltec Bank & Trust Ltd to support its stablecoin.
- USD Coin(USDC)
USD Coin is a stable currency supported by Coinbase, the world’s largest bitcoin broker and the largest bitcoin exchange holder.
- Binance USD(BUSD)
It is worth mentioning that the crypto exchange Binance also released Binance USD, which is pegged 1:1 to the US dollar.
Advantages vs. Disadvantages
Like any form of cryptocurrency, stablecoins have their own advantages and disadvantages.
Advantage
- no border. Stable currency retains all the power of cryptocurrency and can move without being affected by physical boundaries.
- Transaction speed. Financial transactions on the blockchain are objectively faster than traditional processes. Stablecoin transactions do not need to wait for a third party to verify the transfer, which means that no one pays any third party fees.
- transparency. Unlike fiat currencies, transactions using stable currencies are recorded on a public ledger and anyone can monitor them.
Disadvantage
- Centralized. Unlike some cryptocurrencies, stablecoins are mostly created by centralized organizations that own the currency. Even DAI, a highly regarded stablecoin that promotes itself as decentralized, faces scrutiny due to its centralized organization.
- A third-party review is required. Stablecoins must be audited by a third party, which may create a conflict of interest in a decentralized, trustless or pseudonymous experience.
- Less growth. Stablecoins do not provide investors with the potential for high return on investment like unlinked cryptocurrencies.
Use stability to create profitability
Most crypto investors may agree that having one or two stablecoins in your portfolio is a good way to diversify and protect your investment. If you are actively trading altcoins with greater volatility, you can also use stable currencies to quickly get rid of falling assets and repurchase them at a better price.
Will stablecoins completely disrupt the crypto field? In fact, a complete takeover is unlikely, because the ultimate goal of stable currencies and unlinked cryptocurrencies is completely different.
It is more likely that in the digital transformation of currency, stable currency becomes another financial tool. Exchanges can provide liquidity for the trading market, provide a trading medium for risk-averse investors, and protect physical assets in the digital field.
