Why Stablecoins are Needed
Stablecoins are fixed-rate cryptocurrencies. Stablecoins are tied to the rate of fiat currencies, which makes them a convenient form of settlement. The volatility of cryptocurrencies is very high. Stablecoins remain one of the few assets which allow you to lock your profits into fiat equivalents without withdrawing your funds from the exchange or wallet.
Look at the BTC intraday volatility chart below:
As we can see, at some points, daily volatility reached 40%. Such an asset is not very suitable for calculations. For example, you decide to sell 0.1 bitcoin for dollars. You find a buyer and agree on a price. As you are going to send the traded cryptocurrency to the specified address, the buyer changes his mind because the cost of bitcoin changed by 10% and is not in his favor. The postponed deal leaves you inconvenienced.
Stablecoins were invented to avoid the problem described above. You sell your BTC in advance for a liquid stablecoin, then exchange it for fiat currency.
The Birth of Stablecoins
The idea of stablecoins floated below the surface for some time. Three years after the launch of bitcoin, the first studies on stable cryptocurrencies appeared. But first things first.
In January 2012, American developer Jay R. Willett published a work entitled “The Second Bitcoin Whitepaper.” In it, he described a way to create new tokens based on the bitcoin blockchain.
The add-in protocol is called Mastercoin. The author explained it was to allow end-users to create a cryptocurrency with a fixed rate by binding to another currency or product. A year later, Willett held the first token sale and raised $500,000 to launch his project. In November 2014, based on that protocol, the Realcoin cryptocurrency, now known as Tether, was launched. Realcoin became the first stablecoin whose value tied directly to fiat money.
Realcoin was based on the idea that 1 Realcoin = 1 USD, which is in the bank account of the issuing company Realcoin. The weak point of stablecoins tied to fiat currencies is the need for an intermediary company that must accept funds, store them, and maintain the rate. Most stablecoins are suspected of not doing this. A regular audit partially solves the problem. Although, there is no guarantee the funds don’t arrive in advance and then get quickly withdrawn from the account after the audit.
In this regard, the story with Tether is indicative. During the audit, they accounted for $850 million on their accounts, with a total capitalization of around $2 billion. In April 2019, 1 USDT was approximately $0.6. There is currently a legal battle between the Attorney General of New York and Tether about this very thing.
In July 2014, developers Dan Larimer and Charles Hoskinson introduced the BitUSD stablecoin released on the BitShares blockchain. Unlike Tether, the reserve asset in their model was not a fiat currency, but BTS tokens directly. Difficulties maintaining the stability of the coin and the limited scalability of the blockchain led to a sharp fall in value. It dove down to $0.4 by the end of 2019.
The third unique model of stablecoins was Seigniorage Shares or an unsecured model. This concept can be called the central bank on the blockchain. Adding critical a step helped regulate the exchange rate of this cryptocurrency. If the price rises above $1, the smart contract issues extra coins. Then, they will be sold on the open market until the price drops to the target mark ($1).
Or, the issuer buys tokens to maintain the price of the coin during periods of undervaluation. If the opportunities to support the course are already exhausted, and the stablecoin price is still below $1, then the issuer issues the so-called “Seigniorage Shares.” The latter enables coin holders to receive future income from seigniorage (issuer’s profit).
The first stablecoin operating on this model — NuBits — has crashed twice since its launch in September 2014. The first time this happened after a sharp jump in the cost of BTC, for the purchase of which NuBits holders massively sold their tokens. The reason for the second fall was the lack of sufficient reserves to cope with a decrease in demand.
Which Stablecoin to Choose
Today, the most popular stablecoins are those that are backed by traditional assets. We have already talked about USDT (Realcoin) above. Its capitalization is four times greater than the total capitalization of the remaining stablecoins.
Here is a list of stablecoins included in the Top 200, according to Cryptorank.
Seven stablecoins are pegged to the USD: Tether, USD Coin, Paxos, True USD, DAI, USDK, and Binance USD. The Terra SDT is pegged to the Singapore dollar, Stasis EURS to the euro, and the Diamond Platform Token to diamonds.
Transfer speed and fees are additional details which are of the utmost importance when comparing stablecoins. Stablecoins operate on different blockchains, which is what makes the difference.
USDC, PAX, DAI, EURS, DPT, and USDK work ONLY on the Ethereum blockchain.
TUSD and BUSD work on both the Ethereum blockchain and BinanceChain.
USDT runs on OMNI, Ethereum, Tron, and EOS blockchains.
For calculations, most use coins tied to the dollar.
There are four stablecoins on BestChange. USDT OMNI, and USDT ERC20. A deal using USDT ERC20 will be faster because the Ethereum blockchain can process more transactions per second than the OMNI blockchain. Also, Ethereum has a lower commission.
Let’s Analyze the Most Popular Stablecoins in Detail
- On all centralized exchanges
- The most liquid stablecoin
- Exists on 4 of the largest blockchains
- The most popular stable for calculations
- Caught up in the money-laundering scandal in the Panamanian offshore
- There is no evidence that it is 100% secured
- There is an ongoing legal battle in NY Courts. The results of which the parent company of Tether (Bitfinex) may have significant problems affecting USDT as well.
USD Coin (USDC)
- Goldman Sachs-backed Circle Internet Financial Limited (aka, Circle) established USDC in 2018
- Supported by financial giants Goldman Sachs and BitMain;
- Present on most exchanges
- When the USD Coin launched, there were squeezes in the USDC trading pair. Things have since stabilized.
- Positions itself as the world’s first regulated crypto asset
- Just like USDC was created in 2018
- Present only on large exchanges
Based on the above, we can conclude that it is better to use USDC and PAX for storing funds since they are the most transparent and not involved in scandals. A large number of crypto assets are tied to the USDT, so if you are an active trader, it will be more convenient for getting into and out of a trade and also to calculate using the USDT.
Stablecoins combine the advantages of cryptocurrencies and fiat, saving you from the hustle of figuring out Satoshi values and they insure against a sudden change in rate