Stablecoins are likened to the bridge between cryptocurrencies and the traditional financial system. So What are stablecoins? And what types are there now?
First, I will not give a definition of what Stablecoin is. Instead I will say why it exists. In other words, what problem was it born to solve?
With such an approach, I think it will be easier for newcomers to understand. Because I used to do the same.
The reason for the birth of Stablecoins?
Large price swings are the “interesting” feature of the crypto market. There are coins that fluctuate to 10% in just a few hours.
For example, there are projects that are excessively FOMO because they are praised by some celebrities online.
There are also coins that make a red stick due to the project being hacked or the founders leaving the project and running away with the money.
Such large price movements are an opportunity for traders to get rich overnight. But there are also many people who are terrified.
Because “Everyone’s risk aversion is different”. Some people like salty food, some like sweet food. Some like war, some love peace...
It is this characteristic that makes cryptocurrencies difficult to use in everyday life. They cannot trade off things like speed and convenience for too high a risk.
Surely you will not want to receive a salary today, but the next day that money has lost 30% of value?
But no one can stop the wheel of history. In this case blockchain technology & cryptocurrencies.
So is there a way to keep the great points of crypto and still make it stable? The answer is Stablecoins.
Stablecoins are the bridge between the cryptocurrency market and the traditional financial system. Currently these two markets exist with very little interaction with each other.
What are stablecoins?
According to Wikipedia:
A stablecoin is a cryptocurrency in which a price is designed to be pegged to cryptocurrencies, fiat money, or to exchange traded goods.
In an easy to understand way. “Stable” means “stable”; “coin” means a cryptocurrency.
So stable coins have 2 characteristics:
- Is a type of electronic money
- Has a stable value
So why is it stable? That's because it is pegged to a fiat currency like USD, EUR or VND.
Fiat money is money issued by a country. For example, the United States has USD, Japan has Yen, Vietnam has VND…
Because it is pegged to a fixed currency, Stablecoin is global, less volatile & does not depend on any central bank.
These Stablecoins are reliable because it is backed by real money, another cryptocurrency, or by an algorithm.
You can learn more about these Stablecoins in the following section.
Benefits of Stablecoins
Stablecoins bring many benefits including:
- Safe haven assets.
- Portfolio protection for traders & investors.
- Take profits without having to withdraw Fiat money.
So in summary. Stablecoin is a cryptocurrency that is pegged to a specific fiat currency, so it is quite stable.
Because of its stability, it avoids the risk of large market fluctuations.
There are different types of Stablecoins. For newbies, just knowing USDT, BUSD, USDC is enough.
3 types of stablecoin today
If you are a newbie you will probably know about USD Tether (USDT). This is considered the most popular stablecoin.
As I see it, just having USDT is enough to solve your 90% transaction needs.
See more: What is USDT? Where to buy USDT? cheap, reputable
However, in addition to USDT, there are dozens of other types of stablecoins. Divided into 2 main types are mortgaged & unsecured.
Below is a live chart of the total daily supply of Stablecoins from The Block. You can click on each type of Stablecoin like USDT, USDC, BUSD, UST… to see details:
Stablecoins can be collateralized with fiat money, gold or other cryptocurrencies. So there will be 3 types as follows:
This is a stablecoin backed by fiat money. For example, if Tether wants to issue 1 USDT, it must be secured with 1 USD in the bank.
Or if VNDC wants to issue 120 billion VNDC tokens, it must mortgage 120 billion VND (1 VNDC = 1 VND).
Stablecoins of this type: USD Tether (USDT), Binance USD (BUSD), USD Coin (USDC)…
- Even if the crypto market crashes, this stablecoin is still immune. Because it is backed by collateralized fiat money.
- Price stability. Not 100% but very little volatility.
- Avoid the risk of being hacked because the secured asset is not on the blockchain.
Defect: Less decentralized because it relies on a central entity. Need trust & transparency from the issuer.
This is a stablecoin collateralized with another cryptocurrency. Hosted on the blockchain and based on Smart Contracts.
To avoid excessive price fluctuations of collateral crypto, the issuer will have to collateralize more.
For example, you need to spend 2,000$ ETH as collateral for 1,000 Stablecoins priced at $1. So the ratio here is 200% ($2,000 take $1,000).
If the price of ETH falls within the allowable range, the value of this Stablecoin will remain stable.
Examples for Stablecoins of this type: BitUSD (collateralized by BitShare), DAI (collateralized by Ether)…
Advantage: Decentralized, transparent.
- Depends on collateralized crypto.
- Price volatility is higher than a Fiat mortgage.
3. Non-collateralized stablecoins
This is a stablecoin that is not collateralized by any kind of asset. Works thanks to the elasticity of supply and demand based on algorithms.
Functionally it's the same way a central bank regulates a country's currency.
Advantage: There is no need of collateral. Decentralized, independent.
Defect: Complicated. It is difficult to analyze the security of the system.
There are also stablecoins backed by precious metals such as gold, silver... Mining gold and silver is more difficult than "making money out of thin air".
An example of this stablecoin is Digix Gold Token (DGX)…
Top 5 stablecoins
Here are 5 stablecoins that fall into all 3 categories according to CoinGecko:
- Tether USD (USDT): $82 billion
- USD Coin (USDC): $50 billion
- Binance USD (BUSD): $17 Billion
- TerraUSD (UST): 17 billion dollars
- DAI: 8 billion dollars
So, I just went through what Stablecoin is as well as the popular stablecoins today.