Stablecoins aim to be the best form of digital currency while retaining stability. Plus, you get the benefits of money not governed by any central authority: decentralization at its finest.
This article looks at the best five stablecoins and how they live up to their name.
What are stablecoins?
Stablecoins are a type of cryptocurrency designed to decrease volatility with a stable price. They achieve this by being pegged to a fiat currency (often the US dollar), a commodity, another digital currency, or even an algorithm.
A stablecoin should be collateralized on a 1:1 basis to the underlying asset. In simple terms, its value should always be 1. Now, let’s briefly cover the overarching benefits and drawbacks of stablecoins before looking at the top 3.
Pros and cons of stablecoins
- Decentralization: As stablecoins are digital, you can transact with them outside the traditional financial system.
- Zero volatility: You can enjoy the benefits of digital money without worrying about a potential loss in value (in most cases).
- Hedge against falling markets: Here, 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 platform, you tend to earn higher yields on your money (up to 20%).
- Still prone to some centralization: The issuance of many stablecoins still relies on trusted custodians. These organizations may not have the best intentions for their users.
- Lack of transparency: One critical feature of stablecoins is proving audited reserves. Some companies, most notably Tether, have failed in this regard.
- Still vulnerable to liquidation risks: In short, stablecoins can ultimately become unstable, especially algorithmic ones (as with TerraUSD). The systems may experience some malfunction, leading to millions of clients liquidating their assets.
1. UST (Tether)
While arguably the most controversial, Tether remains the largest in the stablecoin niche. Its dominance is purely down to first-mover advantage. Tether (by Tether Limited) is a USD-backed stablecoin launched in October 2014.
This stable token was initially issued using Ethereum. Yet, unsurprisingly, given its fast growth, several blockchains like BNB Beacon Chain and Solana can mint new UST.
2. USDC (USD Coin)
USD Coin is another dollar-collateralized stablecoin released in September 2018 (the second-most used stable token). The company behind this project is Centre, a group consisting of Circle, Bitmain, and Coinbase.
According to Centre, the token is reserve-backed by USD cash and short-term US Treasury bonds.
USDC came to offer better transparency than Tether. Thus, many experts regard the former as the safer stablecoin since Centre makes more effort to provide audits and integrate with regulators.
3. BUSD (Binance USD)
BUSD is a dollar-backed stablecoin released in September 2019 by Binance in partnership with Paxos. Like USD Coin, Binance USD prioritizes transparency. Its dollar reserves consist of cash stored in bank-issued omnibus accounts and US Treasury bills.
As a Binance client, using BUSD becomes natural as you tap into the exchange’s expansive ecosystem of activities like earning interest, payments, etc.
When Satoshi Nakamoto created Bitcoin, they solved the problem of having a digital form of money not controlled by any governing body. Although this freedom was celebrated, it brought about various issues, such as price instability and high 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.
About the Creator
- fascinated by the financial markets & TradingView charts. Freelance writer @upwork (www.upwork.com/freelancers/langan)
Medium account: medium.com/@lihle_ntuli
Also a humble music nerd, football fan, knowledge hoarder, peace/love extremist.