What are Stablecoins?

Stablecoins can be considered relatively safe compared to other cryptocurrencies due to their stable value. However, their safety ultimately depends on the specific type of stablecoin and its underlying asset or mechanism for maintaining stability.

Stablecoins that are backed by highly-regulated fiat currencies, such as the US dollar, may be considered safer than those backed by less stable assets, such as commodities or other cryptocurrencies. However, there is still some degree of risk involved as stablecoins are still subject to the risks associated with the underlying assets.

It's important to note that stablecoins are not risk-free and can be subject to market fluctuations, regulatory changes and other unforeseen events - such as de-pegging - that can impact their stability. 

As with any investment, it's important to do your own research and carefully consider the potential risks and rewards before investing in stablecoins. Despite the relative safety in the design of the stablecoin product, asset-backed stablecoins will ultimately be susceptible to the same factors of volatility and risk associated with the asset they are backed by. A decentralised stablecoin would theoretically be safer from manipulation, but the collateral still requires safe keeping and any asset may suffer from loss of confidence in the market.

Stablecoins are cryptocurrencies designed to minimise price volatility, relative to a pool or basket of stable assets. A stablecoin could be pegged to cryptocurrency, fiat currency or commodities. Stablecoins that are redeemable are said to be backed, whereas those tied to an algorithm are referred to as seigniorage-style, i.e. not backed. Seigniorage-style coins are managed by algorithms to control the stablecoin’s money supply, similar to the approach of printing and destroying currency used by central banks. Seigniorage-based stablecoins are less popular than their back counterparts.

Stablecoins are typically pegged to underlying assets in order to maintain a stable value. The specific mechanism for pegging varies depending on the type of stablecoin. Here are a few examples:

1. Fiat-collateralised stablecoins: These stablecoins are backed by a reserve of fiat currency, such as the US dollar or Euro. The value of the stablecoin is pegged to the value of the underlying fiat currency. For example, for every stablecoin issued, the issuer holds one US dollar in reserve. This ensures that the stablecoin's value is always equivalent to the value of the underlying asset.

2. Crypto-collateralised stablecoins: These stablecoins are backed by a reserve of other cryptocurrencies, such as Bitcoin or Ethereum. The value of the stablecoin is pegged to the value of the underlying cryptocurrencies. For example, for every stablecoin issued, the issuer holds a certain amount of Bitcoin in reserve. This ensures that the stablecoin's value is always equivalent to the value of the underlying asset.

3. Algorithmic stablecoins: These stablecoins use a complex algorithm to maintain a stable value. The algorithm adjusts the supply of the stablecoin in response to changes in demand, in order to keep the price stable. For example, if the demand for the stablecoin increases, the algorithm may increase the supply of the stablecoin to bring the price back down to its pegged value.

In summary, stablecoins are typically pegged to underlying assets in order to maintain a stable value. The specific mechanism for pegging varies depending on the type of stablecoin, but can include fiat or crypto reserves, or complex algorithms.

The de-pegging of stablecoins from their underlying assets can result in significant risks for investors and users. Here are some of the potential risks:

1. Volatility: Stablecoins are designed to maintain a stable value, but if they de-peg from their underlying asset, their value can become highly volatile, which can result in significant losses for investors. This was most notable in the collapse of TerraUSD (UST), an algorithmic stablecoin built on the Terra blockchain. The cryptocurrency was designed to be pegged to the US dollar, meaning that it would always be worth $1 and maintained through an intricate token mechanism, making it an algorithmic stablecoin. 
2. Liquidity: If a stablecoin de-pegs from its underlying asset, it may become difficult to exchange it for other assets or currencies. This can result in reduced liquidity and make it difficult for investors to exit their positions.
3. Counterparty risk: Stablecoins that are backed by a single entity or company may pose counterparty risk if that entity fails or defaults on its obligations. This can result in a complete loss of value for investors.
4. Regulatory risk: Stablecoins that are not compliant with regulatory requirements may face regulatory intervention, which can result in their de-listing from exchanges or even a complete ban. This can result in significant losses for investors.
5. Reputation risk: The de-pegging of a stablecoin can damage its reputation and result in a loss of trust among users and investors. This can impact the long-term viability of the stablecoin and result in reduced adoption and usage.

In summary, the de-pegging of stablecoins from their underlying assets can result in significant risks for investors and users, including volatility, liquidity, counterparty risk, regulatory risk, and reputation risk. It's important for investors to carefully consider these risks before investing in stablecoins.

Stablecoins can be either decentralised or centralised, depending on their underlying design and technology. Most of the popular stablecoins are centralised and backed by fiat currency, such as the US dollar. These projects are run and fully controlled by the private bodies that issue them.

Decentralised stablecoins are designed to operate on a decentralised blockchain network and are typically backed by decentralised assets, such as cryptocurrencies. These stablecoins are usually governed by decentralised autonomous organisations (DAOs) or smart contracts, which automatically adjust the supply of the stablecoin based on market demand. Examples of decentralised stablecoins include DAI, USDC, and TUSD.

On the other hand, centralised stablecoins are backed by centralised assets, such as fiat currency or commodities, and are typically controlled by a central issuer or a group of issuers. These stablecoins are often subject to regulatory oversight and require users to trust the issuer to maintain the stability of the stablecoin. Examples of centralised stablecoins include USDT, GUSD, and PAX.

In summary, stablecoins can be either decentralised or centralised, depending on their underlying design and technology. Decentralised stablecoins are typically governed by DAOs or smart contracts and are backed by decentralised assets, while centralised stablecoins are typically backed by centralised assets and are controlled by a central issuer or group of issuers.

Regulation of stablecoins varies depending on the jurisdiction and the type of stablecoin. As yet, they are not all fully regulated but watch this space. Stablecoins are coming under increasing scrutiny by regulators. For example, stablecoins have been seen as a priority since 2020, with new President of the European Central Bank, Christine Lagarde, acknowledging that stablecoins will be an area of focus for her tenure. This increased the position of cryptocurrency as a global priority for the ECB. 

In general, stablecoins that are backed by fiat currency or other traditional assets are subject to similar regulations as those assets. For example, if a stablecoin is backed by U.S. dollars, it may be subject to the same regulatory framework as a traditional bank account or money market fund. This could include oversight by financial regulators such as the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC).

Stablecoins that are backed by cryptocurrencies or other digital assets may be subject to different regulations. In some cases, they may be considered securities or commodities and fall under the jurisdiction of the SEC or CFTC. In other cases, they may be subject to regulations specific to the blockchain or cryptocurrency industry, such as anti-money laundering (AML) and know-your-customer (KYC) regulations.

There is currently a lack of clear regulatory guidance around stablecoins in many jurisdictions, which has led to concerns about their potential use in illicit activities such as money laundering and terrorist financing. As a result, some regulators are taking steps to increase oversight of stablecoins, such as requiring issuers to obtain licenses or register with regulatory authorities.

Overall, the regulation of stablecoins is a complex and evolving area, and it is important for issuers and users of stablecoins to stay up to date with regulatory developments in their jurisdiction.

Stablecoins are commonly used in cryptocurrency trading as a means of hedging against the volatility of other cryptocurrencies. Here are a few examples of how stablecoins are used in trading:

1. Crypto-to-crypto trading: Traders may use stablecoins as an intermediary currency when trading between two cryptocurrencies. By using a stablecoin, traders can avoid the volatility of other cryptocurrencies during the trading process.

2. Trading pairs: Some cryptocurrency exchanges offer trading pairs that include stablecoins. For example, a trader may be able to trade Bitcoin for a stablecoin, such as Tether (USDT), instead of trading Bitcoin directly for fiat currency. This allows traders to maintain a stable value for their holdings during the trading process.

3. Margin trading: Some cryptocurrency exchanges allow margin trading using stablecoins as collateral. Traders can use stablecoins to secure their positions and reduce the risk of margin calls due to price fluctuations in other cryptocurrencies.

4. Arbitrage: Traders may use stablecoins to take advantage of price differences between different cryptocurrency exchanges. By buying a cryptocurrency on one exchange with a stablecoin, and then selling it on another exchange for fiat currency, traders can profit from the price difference while avoiding the volatility of other cryptocurrencies.

In summary, stablecoins are commonly used in cryptocurrency trading to reduce the volatility of other cryptocurrencies, as an intermediary currency, in trading pairs, as collateral for margin trading, and for arbitrage opportunities.

A fractional stablecoin is another term for a fractional reserve stablecoin. A fractional reserve stablecoin is a type of stablecoin where the amount of the underlying asset held in reserve is less than the total value of the stablecoins in circulation. This means that the stablecoin issuer does not hold sufficient reserves to fully back all the stablecoins in circulation, and as such, these stablecoins are considered to be partially backed or fractional.

Fractional reserve stablecoins are different from fully backed stablecoins, where the issuer holds a reserve of the underlying asset that fully backs the stablecoin in circulation. Fully backed stablecoins are generally considered to be more secure and less risky than fractional reserve stablecoins, as they offer users more certainty that their stablecoin holdings are fully backed by the underlying asset.

Fractional reserve stablecoins are typically used by issuers to increase the supply of stablecoins without having to hold the full amount of the underlying asset in reserve. However, fractional reserve stablecoins can be risky as they are vulnerable to sudden increases in demand for redemption, which could exceed the available reserves, leading to a collapse in the stablecoin's value.

In summary, fractional reserve stablecoins are stablecoins where the amount of the underlying asset held in reserve is less than the total value of the stablecoins in circulation. These stablecoins are considered to be partially backed and are riskier than fully backed stablecoins.

The number of stablecoins in circulation is constantly changing, as new stablecoins are introduced and some may cease to exist. There are over 200 stablecoins in total, with a total market capitalisation of over $100 billion. However, only a handful have a meaningful market cap.

The most popular stablecoins in terms of market capitalisation are Tether (USDT), USD Coin (USDC), Binance USD (BUSD), Dai (DAI), and TUSD (TrueUSD).

It is important to note that the stablecoin market is rapidly evolving, and the number and popularity of stablecoins can change quickly based on market demand and regulatory developments. Therefore, it is always best to consult up-to-date sources of information for the latest on the number and types of stablecoins in circulation. The most popular stablecoins are listed below.

• Tether (USDT) is a stablecoin that is designed to maintain a stable value relative to the US dollar. It is issued by Tether Limited, a company that claims to hold reserves of US dollars and other assets to back the USDT in circulation.
• Tether (USDT) is one of the most widely traded cryptocurrencies in the world and is a key player in the cryptocurrency market. It is used as a trading pair on many cryptocurrency exchanges and is often used as a "safe haven" asset during periods of market volatility. Its stable value relative to the US dollar also makes it a popular option for users looking to hedge against cryptocurrency market fluctuations.
• USDT is also used for remittances, payments, and other blockchain applications. 
• Tether had a controversial beginning, with questions over its collateral reserves and relation with the Bitfinex exchange. There have been concerns and controversies around the transparency of Tether's reserves and the potential for market manipulation, leading some to question the stability of USDT. However Tether remains the most popular stablecoin and the third largest cryptocurrency by market cap.
• USDT is an Omni Layer protocol token that runs on top of the Bitcoin blockchain, and it can also be issued on other blockchains, such as Ethereum and Tron.

• USD Coin (USDC) is a stablecoin backed by US dollars, which are held in reserve by regulated financial institutions. In short, USD Coin is a service to tokenise US dollars and facilitate their use over the internet and public blockchains.
• USDC can be traded and transferred like any other cryptocurrency, and it is widely used as a trading pair on many cryptocurrency exchanges. USDC is also used for remittances, payments, and other blockchain applications.
• The transparency of its reserves and the oversight by regulated financial institutions have made USDC a popular alternative to other stablecoins that have faced scrutiny over their stability and reserves. The tokens themselves are also issued by regulated financial institutions and every token can be redeemed for one dollar — effectively providing a price stable cryptocurrency.
• USD Coin is an Ethereum token, so you can store it in an Ethereum-compatible wallet. USDC can be changed back to USD at any time. The execution of issuing and redeeming USDC tokens is ensured with ERC-20 smart contract.
• USDC was launched on in 2018 and is issued by Centre, a consortium co-founded by Circle and Coinbase. 
•  USDC is an alternative to other USD-backed cryptocurrencies like Tether (USDT).

• Binance USD (BUSD) is a stablecoin that is pegged 1:1 to the value of the US dollar. It is also 1:1 USD-backed and approved by the New York State Department of Financial Services (NYDFS) and issued in partnership with Paxos. Like similar stablecoins, BUSD is a service to tokenise US dollars and facilitate their use over the internet and public blockchains.
• BUSD is fully regulated by a primary prudential regulator - the New York State Department of Financial Services (NYDFS), offering the highest level of consumer protection. All reserves are held 100% in cash and cash equivalents; hence customer funds are always available for 1:1 redemption.
• BUSD can be traded and transferred like any other cryptocurrency. Binance, one of the world's largest cryptocurrency exchanges, supports the use of BUSD for trading, payments, and remittances on its platform, as well as in other blockchain applications and services that support stablecoins. The use of BUSD provides users with a stable and transparent alternative to traditional cryptocurrencies that can be subject to volatility and uncertainty in value.
• BUSD is available on over 30 exchanges and has many popular use cases. Binance-Peg BUSD is currently issued on these blockchains: Ethereum (ERC20), BNB Smart Chain, BNB Beacon Chain, Avalanche, Polygon, Tron and Optimism – more integrations are expected to come soon.

• Dai is a stablecoin and decentralised currency that seeks to operate as digital money. Dai works as a medium of exchange, store of value and unit of account.
• Dai is not a hard-pegged currency, so it does not perfectly track the value of an existing fiat currency. Rather, it maintains a free-floating peg that experiences extremely low volatility against the US dollar.
• All circulating Dai are generated from Maker Vaults and are backed by a surplus of collateral assets. Dai is kept stable through a framework of aligned financial incentives. Notably, in the event of an emergency shutdown, each Dai is redeemable for $1 worth of collateral.
• The Dai token lives on the Ethereum blockchain; its stability is unmediated by any central party and its solvency does not rely on any trusted counterparties.
•  Dai is used in the same manner as any other cryptocurrency. It can be freely sent to others, used as payment for goods and services, or held as a hedge against market volatility.

• TrueUSD (TUSD) is a stablecoin that is designed to maintain a stable value relative to the US dollar. It is issued by TrustToken, a company that claims to hold the equivalent amount of US dollars in reserve to back the TUSD in circulation.
• TUSD is an ERC-20 token that runs on the Ethereum blockchain, and it can be traded and transferred like any other cryptocurrency. TUSD is often used as a trading pair on many cryptocurrency exchanges and is also used for remittances, payments, and other blockchain applications.
• TrustToken has emphasized the transparency and accountability of its reserves, with regular attestations by independent accounting firms to confirm the full backing of TUSD. TrueUSD became the first USD-backed stablecoin to secure minting with Chainlink 'Proof of Reserves'. 

• Formerly known as the Paxos Standard Token (PAX), the Pax Dollar (USDP) is a stablecoin designed to maintain a stable value relative to the US dollar. It is issued by Paxos, a regulated financial institution that holds the equivalent amount of US dollars in reserve to back the PAX in circulation. In addition to USDP, Paxos also issues another stablecoin called Paxos Standard Token (PAXG), which is backed by physical gold.
• USDP is an ERC-20 token issued on Ethereum blockchain. It can be received and sent by users of an Ethereum wallet. Transactions are conducted according to the rules of the Ethereum network and share all of its features, including smart contracts.
• USDP is specifically designed for use in DeFi (decentralized finance) applications, with features such as tokenized yield and liquidity incentives built into its design. USDP is intended to provide users with a stable and reliable stablecoin option for use in decentralized finance applications, which often rely on the use of stablecoins for trading, lending and other activities.
• It was first issued by the Paxos Trust Company in 2018 and is regulated by the New York State Department of Financial Services (NYDFS). As a regulated stablecoin, collateralised by the U.S. dollar, it brings together benefits of both blockchain technology and fiat currency stability. PAX is essentially a digital dollar, but as a crypto asset, it can move instantaneously, anywhere in the world, any time of any day and it is programmable.
• As regards use case, Paxos Standard can be used to limit exposure to crypto-asset volatility, to remove cross-border transaction fees, to move between crypto assets easily or as payment for other blockchain-based assets.
• PAX is now listed on over 150 exchanges, OTC desks and wallets.