What are stablecoins: benefits, types, popular tokens

stablecoins

The cryptocurrency market continues to rush, and many cryptocurrency holders are tired of this “roller coaster. That’s why Stablecoins are getting more and more interesting.

Already from the name, we can see that these digital currencies are stable, but is this possible in the crypto world? Let’s find out.

What are stablecoins

Stablecoin is a cryptocurrency whose exchange rate is fixed and stable. The stability of a digital token or cryptocurrency is ensured by being linked to the market value of another asset.

Assets that serve as collateral may be fiat money (most often the U.S. dollar), or may be gold, gas, oil, etc. nevertheless, stablecoins are based on blockchain.

Stablecoins are payment tokens. They can be used for the same purposes as fiat money and other cryptocurrencies. They can be used to make transactions, they can be exchanged, or they can be used as savings and protection against inflation.

Stablecoins have a lot in common with fiat money and other cryptocurrencies, but they also have special advantages:

  • Protection against volatility – by their nature, stablecoins are a tokenized version of fiat currencies, meaning that a 1% fluctuation in a day is extremely rare, whereas in 24 hours the VTC can fall by 15%;
  • Instantaneous transactions – fiat transfers between countries can take up to several days, plus you have to pay a fee for double conversion (in some cases), the transfer of stablecoin is instant;
  • Decentralization – for certain types of stablecoin, this is a major advantage of cryptocurrencies, which is also characteristic of these tokens.

The stable price of the most popular tokens is maintained by the reserve, which is collateral, or by the use of algorithmic formulas that control supply.   Stablecoins are divided into types according to these criteria.

Types of Stablecoins

To understand the features of each species, let us dwell on them in more detail.

Stablecoins backed by fiat currency

These tokens are the most popular on the crypto market. They are backed by the state currency. Most often tokens are secured by the U.S. dollar.

Let’s take USDT as an example. This coin is equal to one U.S. dollar, so it is secured 1:1.

But in May 2022 there was a collapse, after which the currency fell in value after its digital “sister” Luna. This somewhat undermined the credibility of fiat-backed cryptocurrencies.

Another reason large holders don’t have much confidence in currencies backed by fiat money is centralization. That is, these tokens are issued centrally by certain institutions. The human factor comes into play, and hence the possibility of fraud is not ruled out.

But when it comes to coins, which are most convenient for settlement, providing short-term purchasing power, it is these currencies are considered the most stable and promising.

Stablecoins backed by merchandise

The most popular coin at the moment, which is secured not by monetary assets but by commodities, is the Petromoneda (PTR). It is a coin from Venezuela that is backed by oil.

Different categories of valuable commodities and assets can be used as reserve assets: oil, gold, silver, coal. It can also be real estate, stocks, and other securities.

The funds that organizations receive when holders convert their assets into digital currency, they invest in the chosen collateral commodity, thereby increasing the collateral reserve.

Cryptocurrency-backed Stablecoins

Tokens that are backed by other cryptocurrencies must also be characterized by exchange rate stability. With the volatility of the reserve, such consistency is quite difficult to arrange, so over-collateralization is necessary.

This means that the cryptocurrency reserve in the collateral should exceed the number of issued tokens. That is, if a million stablecoins are issued, the cryptocurrency reserve in their collateral should be $2 million.

This ratio helps protect secured tokens even if the price falls by 50%. The most prominent example of cryptocurrencies secured is the MakerDAO Dai.

DAI is pegged to the dollar but is backed by ETH and several other currencies whose total price is 150% of the price of the Stablecoins in circulation.

Algorithmic Stablecoin

These coins may have no collateral at all in the form of a reserve, so they are somewhat different from other types of stable currencies.

The stability of the exchange rate of these currencies is ensured by an algorithm. Roughly speaking, an algorithm is a computer program that controls all the processes that occur in the field of a given coin.

A few words about the regulation of stablecoins

Stablecoins did not immediately attract increased regulatory attention. At first, they were treated the same way as other cryptocurrencies.

But the market began to show significant growth, and so it was treated as a potential factor of impact on the entire financial system.

Thus, in 2021, IOSCO (International Organization of Securities Commissions) attempted to tighten the regulation of Stablecoins, equating them to payment systems and clearing houses.

The statement was argued that the number of unregulated financial transactions using these types of cryptocurrencies is growing rapidly, threatening the overall state of the financial market.

Some politicians, however, are calling for banking-like regulations in this sector of the crypto market.

Such attempts to regulate collateralized tokens indicate only one thing – the currencies are popular and widely used for both investment and settlement purposes.

Many holders are choosing to keep their assets in stackable tokens as they are more stable.

What are the most popular stablecoins right now

This question will be answered by Wellcoinex experts. A major player on the crypto market, this company works with all types of cryptocurrencies, including secured ones.

The company’s experts highlighted the main tokens that are in demand and, in their opinion, will be stable for a long time.

Tether (USDT)

We won’t discover anything new if we top our list of popular stablecoins with this coin. It experienced a downturn in May 2022 but continues to be the world’s third most popular cryptocurrency in general and the first among secured ones in particular.

The USDT token has reached the position of the leader in the daily volume of transactions, as this coin is one of the very first stablecoins appeared back in 2014.

USD Coin (USDC)

Another popular digital dollar with a high degree of liquidity. It is backed by cash and short-term obligations of the U.S. Treasury. The exchange rate is stable throughout the token’s existence and is expressed as a 1:1 ratio.

USDC is based on Center, built on the Ethereum blockchain supported by Circle and Coinbase. Stablecoin is suitable for investing, lending, trading.

Binance USD (BUSD)

This cryptocurrency is regulated by the New York State Department of Financial Services. This attracts holders because it means stability and reliability of the coin.

Experts believe that this Stablecoin is ideal for portfolio stabilization and long-term storage of savings in the digital field. It is compatible with ERC-20 Ethereum, so it allows for settlement almost all over the world.

This is the top three at the moment, if you want to know more about which stablecoins will soon join the top, please contact Wellcoinex – an expert on the crypto market.

Leave a Reply

Your email address will not be published. Required fields are marked *