What Is a Stablecoin?
Last updated
Last updated
Stablecoins serve as a much-needed antidote to price volatility in the cryptocurrency markets.
Let's look at how they work, shall we?
Most of these digital currencies are collateralized by an underlying asset to deliver price stability.
For example, one of the most common types of stablecoins are those pegged to fiat currencies.A stablecoin such as Tether (otherwise known as USDT) is backed on a 1:1 basis with the U.S. dollar. For every single unit of USDT that's in circulation, $1 is supposed to be set aside and held in reserve by financial service providers. Alternatives include TrueUSD (TUSD) and USD Coin (USDC.)
The number of stablecoins out there has exploded in recent years — as well as the quantity. It's also possible to find crypto assets that are pegged to other fiat currencies such as the euro, and even other cryptoassets!
It seems that the possibilities are endless with this new technology. Some stable coin projects have tied their digital assets to precious metals, or to other cryptocurrencies. Projects such as Facebook's Libra intend to allow stablecoins to be used as a medium of exchange — backed by a basket of different national currencies.
Stablecoins are exceedingly easy to buy, and are listed on most cryptocurrency exchanges, including Binance and Coinbase.
Trading volumes for stablecoins are increasing — and there's a lot of real-world use cases for token holders to get excited about.
For example, at present, many financial institutions often charge astronomical transaction fees when cross-border transfers are being made or one fiat currency is being converted for another — and settlements can take days. Popular stable coins allow transfers to happen instantaneously on the blockchain, and far more cheaply.
Picking the right type of stablecoins can also serve as a much-needed safe haven against short-term price volatility in the Bitcoin market.
Even some of the world's biggest economies are looking into launching new stablecoins — often referred to as central bank digital currencies, or CBDCs. For financial institutions including the People's Bank of China and the Bank of England, blockchain technology is becoming an increasingly important part of monetary policy. Many of these organizations hope on-chain transactions could deliver much-needed modernization, especially as smartphone wallets begin to become more popular than bank accounts.
While we are not making a value judgement on whether these stablecoins are the “best” or not, here is a list of the top ranked stablecoins on CoinMarketCap. As should be obvious by now, this list of stable coins will not be in order of price, since the price of stable coins is always...stable.
Tether is a stablecoin, pinned 1:1 to the U.S. dollar, that is ranked third on CoinMarketCap as of Jan. 8, 2021.
Tether is issued by a Hong Kong-based company, also called Tether. The company originally claimed that each USDT was backed by one USD, but has since said that there is more of a fractional reserve system.
Tether is one of the most popular ways for crypto traders to get in and out of the crypto markets. Tether is widely available, and new Tether are often printed (which can be controversial at times, as Tether has never released an official public audit). While many people use Tether for its convenience, the company Tether has been at the heart of several lawsuits over alleged market manipulation.
You can buy Tether on Binance, OKEx, HitBTC, Huobi Global and other exchanges.
Binance USD is a 1:1 USD-backed stablecoin issued by top crypto exchange Binance, in partnership with Paxos. The stablecoin price is always $1, and BUSD is regulated by the New York State Department of Financial Services. BUSD is ranked at 33 on CoinMarketCap as of Jan. 8, 2021.
You can buy Binance USD on Binance, and redeem the Binance stablecoin from Paxos. BUSD has the same function as any stablecoin — to help crypto traders in the volatile crypto markets by providing a cryptocurrency with a stable price.
The Gemini Dollar (GUSD) is the stablecoin issued by Gemini, a cryptocurrency exchange founded by the Winklevoss twins. The Gemini stablecoin is ranked at number 476 on CoinMarketCap as of Jan. 8, 2021.
The Gemini stablecoin, issued by Gemini and available there for purchase, is meant to provide tokens on the Ethereum network, with the ERC-20 standard, that offer price stability for the crypto markets.
The Gemini stablecoin’s 1:1 price peg is audited monthly by an independently registered public accounting firm.
The Coinbase stablecoin, USDC, is ranked thirteenth on CoinMarketCap on Jan. 8, 2021. The stablecoin, whose price is $1, was launched by crypto exchange Coinbase and payments company Circle as part of the Centre Consortium.
USDC launched in September 2018 with the aim of providing a safe haven to traders in times of volatility, as well as letting businesses accept payment in cryptocurrencies, due to the stable price of USDC.
Both Circle and Coinbase are regulatorily compliant, and a major accounting firm verifies the 1:1 USDC to USD peg. You can buy USDC on Coinbase, as well as Poloniex, Binance, OKEx, Bitfinex and even decentralized exchanges like Uniswap.
Whereas cryptocurrencies such as BTC are fully decentralized, the same can't really be said for stablecoins because of how underlying assets need to be held in reserve. A big challenge is ensuring that these digital currencies are properly collateralized — indeed, Tether has faced legal action in New York following claims that USDT may not be backed 1:1 with the U.S. dollar.
Then there's the tricky issue surrounding regulation. Many central banks reacted with some alarm when Facebook unveiled Libra, fearing that this crypto asset could undermine the sovereignty of fiat currencies and even trigger an economic crash.
Ultimately, it may be some time before stable coins achieve widespread adoption in the real world.
