What are Stablecoins?
A ‘stablecoin’ is a relatively new class of cryptocurrency that attempts to maintain price stability. Stablecoins are backed by a reserve asset or pool of assets. Stablecoins have gained traction as they attempt to offer the instant processing, security and privacy associated with payments in cryptocurrencies, and the volatility-free stable valuations of fiat currencies. Stablecoins may be pegged to a currency like the U.S. Dollar or to a commodity's price such as gold. Stablecoins achieve price stability via collateralisation or through algorithmic mechanisms of buying and selling the reference asset or its derivatives. Some investors use such a cryptocurrency with extremely low volatility as a means of portfolio diversification.
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Are Stablecoins safe?
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.
Are Stablecoins stable?
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.
Are Stablecoins decentralised?
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.
How are Stablecoins regulated?
As yet, they are not regulated but watch this space. Stablecoins are coming under increasing scrutiny by regulators. Last year’s Facebook announcement of the proposed Libra digital currency raised the likelihood of regulatory intervention yet further.
Stablecoins are now seen as a priority for 2020, with new President of the European Central Bank, Christine Lagarde, acknowledging that stablecoins will be an area of focus for her tenure. This has increased the position of cryptocurrency as a global priority for the ECB in 2020.
How many Stablecoins are there?
There are over 200 stablecoins in total, but only a handful have a meaningful market cap. The most popular stablecoins are listed below.
- Tether is a cryptocurrency designed to track the value of the U.S. dollar.
- Tether is a stablecoin – the concept is to create a stable cryptocurrency that can be utilised like digital dollars.
- Tether is the most popular stablecoin and the fourth largest cryptocurrency by market cap.
- Tether has had a controversial beginning, with questions over its collateral reserves and relation with the Bitfinex exchange.
USD Coin (USDC)
- 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.
- 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.
- USD Coin is designed to let dollars move globally from your crypto wallet to other exchanges, businesses, and people.
- USDC was launched on in 2018 in collaboration between Circle and Coinbase.
- USDC is an alternative to other USD-backed cryptocurrencies like Tether (USDT).
Paxos Standard (PAX)
- Paxos Standard Token (PAX) is a regulated stablecoin, which maintains 1:1 parity with the U.S. dollar. It was issued by the Paxos Trust Company in 2018 and is regulated by the New York State Department of Financial Services (NYDFS). Every PAX token is fully backed by the equivalent amount of U.S. dollars, meaning it can also be redeemed for USD at any time.
- Paxos Standard Token (PAX) 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.
- 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.
- In future, Paxos Standard may be used for consumer payments, offering a stable store of value for users outside the United States that face the issues associated with unpredictable and volatile currencies.
- PAX is now listed on over 150 exchanges, OTC desks and wallets.
Multi-collateral DAI (DAI)
- 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.