Getting into cryptocurrency is not for the faint-hearted, the volatility of coins is something everyone can stomach and to constantly ride bull and bear trends can be stressful for many investors. The second issue with cryptocurrency volatility is that it makes it hard to make and accept payments as the value fluctuates you could receive more or less than the agreed-upon value in fiat once you've converted your cryptocurrency.
This is an issue a few cryptocurrency projects have looked to rectify with fiat currency or asset-backed cryptos also known as stable coins.
What is a stable coin?
A stablecoin is a “cryptocurrency that has price stable characteristic. Typically, most stablecoins are pegged against the USD, but some implementations intend to move over to a basket of currencies or an index such as the CPI(consumer price index) in time. This is in hopes of having a currency independent of fiat in future iterations.
While cryptocurrencies like Bitcoin and Ethereum are, by all means, disruptive and game-changing, they serve as an exemplary medium of exchange, but given their volatility, this can pose a problem for users. While stable coins can potentially serve as the backbone of financial applications on the blockchain, especially considering that some of them are compatible with smart contracts they could make the transition to crypto a lot easier for both consumers and businesses.
Why do we need a stable coin?
One of the most common arguments for stable coins is that they are a hedge against volatility. You can insulate yourself from market volatility by holding stable coins instead of cryptocurrencies like bitcoin or Ethereum which is why they are listed on many popular exchanges and often used by day traders to park their earnings.
How stable coins are used for trading
Lets say for argument's sake that bitcoin is priced at $8,000 and you traded 1 BTC for a stable coin which was pegged to USD, you’d have 8000 units of the stable coin. Assuming the price of bitcoin goes down to $7,000 over the course of the week, you still have $8,000 worth of stable coins which can be converted back to BTC anytime. This way, you don’t lose the $1000 worth of value as a result of volatility.
This also makes it easier to buy in on dips and exit on highs without having to convert your money into classic fiat.
Another use case for stable coins are in prediction markets, derivatives, options, etc where a stable coin would be the ideal currency. If you place a bet that has a long timeframe, denominating it in terms of a stable coin makes a lot of sense when compared to a volatile cryptocurrency.
There are a number of so-called stable coins on the market trying to achieve this, with varying degrees of success. There are currently 3 types of stable coins namely:
- Fiat collateralized
- Crypto collateralized
- Non-collateralized
Now that you understand what a stable coin is, lets dive into the options we currently have available on the market.
USDT (Tether)
Tether is a digital currency, which started trading in 2015 and is described as a stable alternative to Bitcoin’s wild price swings. Unlike Bitcoin, Tether tokens are actually backed by reserves of fiat currency held by the company, Tether Limited. Tether was designed specifically to integrate fiat currencies with the blockchain by converting physical cash into a digital asset.
USDT currently has the biggest market cap of any stable coin and there are plans to expand this into other fiat currency like British Pounds and the Euro.
For more on USDT check out my complete review here
TrueUSD
TrueUSD is a relatively new coin in the market that is also pegged on the US dollar. Part of the motivation for launching it stemmed from the controversy surrounding USDT. It is said to be 100% collateralized by USD. The team behind the coin has indicated that the coins’ are legally protected and that the coin is redeemable against the USD in a number of stores and ATMs. TUSD can be paired against BTC, ETH, and Tether and is predominantly traded on Bittrex exchange.
Dai
Dai is a stable coin by MakerDAO. The cryptocurrency works more like the other two above and is valued against the USD on a 1:1 ratio. Even though MakerDAO (DAI) has its value pegged to the USD, it actually isn’t backed up by any real US dollar assets. It derives its value from the collateralized Ether.
The demand for Dai is created via smart contracts run on the Ethereum blockchain. The other fact is that this stablecoin is run by the MakerDAO community. The coin’s parent holding recently entered into a partnership with Dether.io to work on having the stablecoin used on Mobile ATMs. The aim is to give the global community the chance to trade crypto and be able to switch between the coin and any supported cryptocurrency.
BitCNY
bitCNY is one of the stablecoins that is backed up by the Chinese Yuan currency. It is marketed as a truly fungible and smart stable coin. The developers of this cryptocurrency say that the demand for its use relates to the community’s wish to have a coin that protects them from huge risks in the market. It allows users to trade crypto and redeem value supported by real CNY to back up the circulating supply. It runs on the BitShares blockchain and isn’t mineable.
The future of stable coins
Stable coins provide investors with an option of purchasing crypto easily but also at reduced volatility. With a stablecoin, you can exchange crypto when volatility hits the market, helping you to store value, as you ride out the storm which we can all see brings value to the community and also helps facilitate the additional trade of crypto.
However stable coins are not without controversy as has been reported that USDT does not have the funds to back up each digital dollar they currently have in circulation and if this is true we could see a massive destabilisation of the currency leaving the door open for other stable coins to move on that market.
Even though USDT remains the biggest by market cap, rising coins like TUSD, and Dai could pose a challenge, especially if the controversy doesn’t go away.
Have your say
What do you think about stable coins? Do you own any? How do you make use of stable coins?
Drop me a comment and let me know what you think!
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