Stablecoins represent a class of cryptocurrencies that derive their values from other assets to remain stable. Now and then, digital currencies face a common threat known as price volatility. By definition, this problem explains the rapid price movements of cryptocurrencies within a short timeframe. These unpredictable price changes limit investment opportunities and mainstream adoption of digital assets.
Stablecoins provide an effective solution to price volatility since they are pegged to assets like gold or the US dollar. Therefore, stablecoins will maintain a certain price threshold in any market situation.
Today, hundreds of stablecoins are available in the crypto space with a cumulative market cap of $139B as of January 4th, 2023. In that regard, the following article plans to explore and provide insights into some of these assets.
USD Coin
USD Coin (USDC) operates as a stablecoin pegged to the value of a real-world asset, in this case, the US dollar. This digital asset launched in September 2018 in conjunction with Coinbase and Circle.
Ideally, Coinbase and Circle act as USDC issuers while Centre handles the technical frameworks. Hence, to create USDC, a user can deposit US dollars with Circle or Coinbase. The platforms then issue an equivalent amount of USDC to the user. Redeeming the stablecoin for US dollars also follows a similar path since users can send their USDC to Coinbase or Circle. In return, users will get equivalent US dollars from the platforms.
Investors can store USDC in digital wallets, software that allows users to store cryptocurrencies. Digital wallets consist of two main categories: hot wallets and cold wallets. Hot wallets are online-based wallets that are convenient for making transactions. However, this option threatens users since hot wallets are more vulnerable to hacks and other cyber-related activities. On the other hand, cold wallets offer additional security since they run offline.
There are several risks to using USD Coin. One risk is that USDC is a relatively new technology. Thus, It still needs to be made clear how governments worldwide will regulate this asset. Insolvency is yet another drawback that can affect USDC. Here, the issuing platform cannot redeem USDC for US dollars, bringing losses to the investors.
Finally, there is the risk that the value of the US dollar could decline, which can negatively affect the value of the USDC.
Binance USD
Binance USD (BUSD) represents a USD-backed coin launched in September 2019 with Binance and Paxos as the key issuers. The digital currency ranks as the seventh crypto asset with a market cap of $16B. Binance USD plays a vital role in the crypto transaction system. The asset is tradeable across different exchanges and can act as a payment medium for goods and services. Moreover, BUSD allows users to earn interest rates on their deposits.
BUSD follows the guidelines set by the New York State Department of Financial Services (NYDFS). This fact means that the coin must adhere to strict Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations.
Users can store BUSD in any digital wallet that supports the Ethereum blockchain. Such wallets include MetaMask, Trust Wallet, MyEtherWallet, and many more.
It is important to remember that, like any other digital asset, BUSD can expose investors to losses. These losses can occur due to hacks, technical malfunctions, or other unforeseen events. In that respect, storing digital assets in a secure wallet and enforcing strong passwords/2FA measures are advisable. Such steps help protect a user’s account from malicious activities.
Another risk to consider with the asset is the risk of issuer default. While BUSD is backed by US dollars held in reserve, it’s the issuer’s responsibility to redeem the coin for the underlying asset. Once the issuers cannot fulfil their obligation to redeem the stablecoin, holders may lose the value of their investments.
DAI
DAI represents a stablecoin that originates from MakerDAO, a leading DeFi lender. The coin launched in December 2017 and has a market cap of $5.7B.
Essentially, DAI maintains a stable value relative to a specific asset or basket of assets. In the case of DAI, the price of the stablecoin is pegged to the value of the US dollar. As such, one DAI should be worth approximately one US dollar at any given time. The coin also maintains its value by collateralizing multiple digital assets like Ethereum (ETH) and Chainlink (LINK).
DAI’s regulation follows a decentralized path that allows MakerDAO to issue the stablecoin. The Ethereum-based platform (MakerDAO) uses a system of contracts to issue and manage DAI’s value through collateralization. This process lets users deposit a collateral asset like ETH in a smart contract to issue DAI.
One risk of using stablecoins like DAI is the risk of losing value if the underlying collateral loses value. For instance, if the value of the Ether collateralizing DAI significantly decreases, the value of DAI will also decrease.
The decentralized nature of DAI means that there’s no central authority to guarantee or provide support in the event of any problems. Such a system can make it more challenging to resolve issues that may arise, such as lost or stolen funds.
Like any other stablecoin, DAI is compatible with multiple digital wallets. Users can store their coins with MetaMask, Atomic Wallet, and MyEtherWallet, to mention but a few.
Pax Dollar
Pax Dollar (USDP) runs as an ERC-20 stablecoin launched in September 2018.
The US dollar backs the digital currency with Paxos Trust Company as the primary issuer.
The New York State Department of Financial Services (NYDFS) regulates USDP. Moreover, the asset is backed by real US dollars held in reserve by the Paxos Trust Company. As such, a corresponding US dollar is held in reserve for every Pax Dollar in circulation. This mechanism makes it as stable and reliable as the US dollar itself.
Pax Dollar can be stored in digital wallets like Trezor, Ledger hardware wallets, and Trust Wallets. Asides from mitigating volatility, traders can use USDP as an investment tool by holding the asset.
There are some risks associated with using any USDP. One risk is the possibility of cyberattacks, resulting in stolen funds stored in a digital wallet. It’s also possible for digital currencies to be lost if a user loses access to their private key.
Additionally, the value of the Pax Dollar may be affected by the stability of the US dollar and the performance of the Paxos Trust Company.
TrueUSD
Last on the list is TrueUSD, a stablecoin pegged to the US dollar’s value. The goal of TrueUSD is to provide a stable and trustworthy alternative to other cryptocurrencies, which can be highly volatile.
TrueUSD is regulated by the TrustToken Platform, which holds the corresponding US dollars in escrow accounts at multiple banks. This mechanism ensures that there is always a 1:1 ratio between the number of TrueUSD tokens in circulation and the amount of US dollars held in reserve.
TrueUSD can be stored in digital wallets like any other cryptocurrency.
There are several drawbacks to consider when using TrueUSD. One risk is the possibility of fraud or mismanagement by the issuer. Additionally, there is the risk of cyber attacks on digital wallets, which could result in the loss of funds.
Finally, stablecoins are not FDIC insured. Therefore, users can potentially lose their investments if the reserve funds are seized or the issuer becomes bankrupt.
Final Word
Stablecoins are digital assets linked to a stable asset, such as the US dollar or a basket of currencies. These coins aim to provide fast and cheap transactions while avoiding the volatility inherent to most cryptocurrencies.
Various stablecoins exist in the market, each with unique features and risks. Overall, stablecoins have the potential to revolutionize how users trade in the financial world. The long-term success will depend on the assets’ ability to gain widespread adoption and trust from users.