Best 5 Stablecoins – How Do They Live Up to Their Name?
It’s no secret that cryptocurrencies are perhaps the most volatile financial instrument. Unfortunately, this notorious volatility is not conducive for everyday transactions in the modern monetary system.
Stablecoins aim to be the best form of a digital dollar (or whichever other currency) while being as relatively stable as their predecessor. Plus, you get the benefits of money not governed by any central authority, offering the much-heralded freedom of decentralization.
If you’re a crypto investor of any level, you will have already dealt with one price-stable token at some point in your journey. This article looks at the best five stablecoins and how they live up to their name.
Pros and cons of stablecoins
Stablecoins are a type of cryptocurrency designed to minimize volatility by maintaining a stable price.
Such tokens achieve this quality by being pegged to another less volatile asset like a fiat currency (most commonly the US dollar), digital currency, a commodity, or could be backed through some algorithm.
A stablecoin should be collateralized on a 1:1 basis to the underlying asset. In simple terms, its value should always be or close to 1. Now, let’s briefly cover the overarching benefits and drawbacks of stablecoins.
Decentralization: This is perhaps the most significant advantage as it provides flexibility. As stablecoins are blockchain-based or digital, you can transact with them outside of the traditional financial system with the benefits of quick transactions and fewer rules.
Zero volatility: With a stablecoin, you can enjoy the benefits of digital money without worrying about a potential loss in value, which isn’t the case with traditional cryptocurrencies like Bitcoin.
Hedge against falling markets: The common practice here is that investors park their money in stablecoins when the markets are tanking. They can easily re-invest, knowing they’ve maintained their money’s value when things pick up again.
Higher lending interest rates: If you lend a stablecoin on a DeFi (decentralized finance) platform, you tend to earn higher yields on your money (up to 20%) than other tokens.
Still prone to some centralization: The issuance of many stablecoins, especially those backed by fiat currencies, still relies on trusted custodians (who keep the underlying asset in reserves). Such organizations may not necessarily have the best intentions for their users.
Lack of transparency: This point is an extension of the previous. One critical feature of stablecoins is proving audited reserves. Some companies, most notably Tether, have failed to prove they have US dollars as security.
Still vulnerable to liquidation risks: In short, stablecoins can ultimately become unstable, particularly those controlled algorithmically (as is the recent case with TerraUSD). The systems in place may experience some malfunction, leading to millions of clients liquidating their assets due to fear or lack of trust.
Tether has arguably been the most controversial stablecoin in recent history. Nonetheless, it remains the largest in this niche and the third-most traded cryptocurrency overall. Therefore, its dominance is purely down to first-mover advantage and familiarity.
Initially called Realcoin, Tether is the first-ever released stablecoin launched in October 2014 by the Hong Kong-based Tether Limited. Tether is a USD-backed stablecoin pegged to the US dollar on a 1:1 ratio by having reserves of this fiat currency for every USDT.
This stable token was originally issued using Ethereum. Yet, unsurprisingly, given its fast growth, several blockchains like BNB Beacon Chain and Solana can mint new USDT.
USDC (USD Coin)
USD Coin is another dollar-collateralized stablecoin released in September 2018. The company behind this project is Centre, a consortium consisting of Circle, Bitmain, and Coinbase.
USDC is the second-most used stablecoin and fourth-most traded digital currency overall. According to Centre, the token is reserve-backed by financially-regulated USD cash and short-term US Treasury bonds.
USDC was created to offer better transparency than Tether. Therefore, many experts regard the former as the safer stablecoin since Centre makes a higher effort to provide regular audits and integrate with several recognized regulatory authorities.
BUSD (Binance USD)
BUSD is a dollar-backed stablecoin released in September 2019 by the Binance exchange in partnership with Paxos, a New York-based financial technology corporation. Given that Binance has been the largest exchange by trading volume for years, it’s no surprise that this token is the third-most-popular stablecoin.
Similar to USD Coin, Binance USD prioritizes transparency. Its dollar reserves consist of cash stored in bank-issued omnibus accounts and US Treasury bills. Unlike Tether (which uses less regulated offshore banks), BUSD tokens are backed by US banks.
Binance USD undergoes monthly audits carried out by Withum. As a Binance client, using BUSD becomes natural as you tap into the exchange’s expansive ecosystem of activities like earning interest, payments, loan collateralization, etc.
Dai is a unique USD-pegged stablecoin and best addresses the problem of centralized issuance. The token was launched in December 2017 by the MakerDAO, a DAO (decentralized autonomous organization) associated with the Maker Protocol.
Maker is an open-source, decentralized software platform designed specifically to manage DAI’s issuance. This stablecoin works on collateralized loans that are dominated in Ether (ETH) using smart contracts.
Therefore, it doesn’t rely on the backing of real dollars held by a centralized custodian. Hence, the generation of DAI occurs when borrowers lock ETH and other coins as collateral.
USDN (Neutrino USD)
USDN is a less popular stablecoin, unlike the previous four we’ve explored. It’s an algorithmically-pegged stable token designed by the Neutrino Protocol, a Waves-built application for creating such tokens.
USDN is still backed 1:1 to the US dollar. Yet, instead of relying on USD reserves, it primarily depends on WAVES and NSBT (Neutrino’s utility coin) tokens.
As an algorithm-based stablecoin, Neutrino utilizes complex techniques like arbitration bots and smart contracts to ensure the peg remains at equilibrium regardless of any price variances in NSBT and WAVES.
When Satoshi Nakamoto created Bitcoin, they solved the problem of having a digital form of money not controlled by any governing bodies. Although this freedom was celebrated, it brought about various issues such as price instability and fervent market speculation.
Most economists believe money should serve three purposes: act as a medium, a unit of account, and a store of value. Traditional cryptocurrencies are not the best for the latter quality, which is where stablecoins bridge the gap.
Although these tokens are not a perfect solution, it’s the best thing that crypto investors have, at least for now.
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