(Main image source: Swissborg)
Stablecoins are arguably the most useful asset in the world of cryptocurrency. This is because they allow you easily “protect” your funds during trading. Before stablecoins existed, if you made a huge profit trading Bitcoin or Ethereum, you would have to find some way of cashing out those funds ASAP. That wasn’t easy, because you’d have to find someone willing to buy your crypto for its current market price, and you’d have to pray that the network wasn’t so congested that it would take hours for you to transfer funds. During that period, the price could fall substantially. This made it a not so fun time for traders. Not only that, but even if you managed to pull out in time, you now have a nightmare of taxes to deal with.
Stablecoins make it possible for you to quickly sell your Bitcoin, Ethereum, or dozens of other cryptocurrencies for a digital version of a US dollar using a cryptocurrency exchange. That is in fact what a stablecoin is: a class of cryptocurrency which is pegged to a fiat currency such as the US dollar. In other words, they are always worth 1$USD (within a very small margin of error). Almost every crypto exchange has at least 1 type of stablecoin you can trade with, and this trading pair usually has the highest volume. This lets you quickly get in and out of crypto assets without having to cash out of the system, and in some countries also means you do not have to worry about tax authorities coming after you.
There are about a dozen stablecoins in existence, and each issuer of stablecoins holds (in theory) the same amount of US dollars for stablecoins in circulation. For example, there are 10 billion Tether (USDT) currently in circulation. This means that Tether (the company) should have 10 billion US dollars somewhere in a bank to back the 10 billion USDT. As you will see, this requirement has not exactly been met by Tether, and many questions have arisen about whether the companies which issue these stablecoins really have the assets necessary to back them.
This blog post will cover the 5 most popular stablecoins and give a brief analysis of each, namely their stability and trustworthiness. Before we dive into it though, you might be wondering how the companies which issue these stablecoins make their money. This is quite simple: you can buy the stablecoins directly from them at a premium, which “mints” new coins and puts them into circulation. When these coins are sold back to the company (you do not have to do this, but you can) they will take a small cut of the money you are withdrawing and burn the equivalent amount of tokens. So for example, you want to cash out 50 USDC from Circle, the company which issues them. You send 50 USDC to their platform, fill out some personal information, and they will take a few percentage points as profit, and transfer the remaining amount to your bank account.
Tether is the largest stablecoin currently on the crypto market. It ranks as the 4th largest cryptocurrency by market cap. It is by far the most controversial and this is for two reasons. The first is that Tether may have been used to over almost a billion dollars in lost funds for the Bitfinex exchange, and the second and by far more concerning controversy involves its lack of backing. Unlike other major stablecoins, Tether is technically not backed by an equivalent amount of US dollars in the bank, but is instead backed by a basket of assets including loans issued to affiliate companies. Some believe it will eventually be overtaken by more trustworthy stabelcoins for these reasons.
Looking at a history of Tether’s stability, it has deviated quite substantially from its USD peg on multiple occasions, dropping to 90 cents USD and reaching a high of 1.21 USD in 2017. Although the price has largely fluctuated within a 1 cent margin of error since then, it has still deviated up to 5% from its intended price. Tether’s market cap has also doubled in the past year, leading some to believe that it may be being used for market manipulation, and further calls into question whether Tether Limited, the company which issues Tether, really has the funds necessary to back the amount of issued Tether. Lastly, you are not able to exchange USDT for actual USD with Tether Limited, which is a major drawback compared to other stablecoin issuers.
USD Coin (USDC)
USD Coin is the second largest stablecoin by market cap, currently ranked as the 18th largest cryptocurrency. Whereas Tether has been around for many years, 2020 marks USDC’s second year of operation and it has seen impressive gains in use during this time. This is primarily because Circle, the company which issues USDC, is the same company behind Coinbase and Bitcoin mining company, Bitmain. USDC is fully regulated and does in fact have the USD funds required to back the amount of USDC currently in circulation. You are also able to exchange USDC to USD via Circle. This burns (destroys) those tokens and removes them from the supply. Note that you can pay a pretty hefty premium for doing this.
Although USDC has historically been much more stable than USDT, it has still fluctuated substantially from its pegged price. It hit a high of 1.11 USD in 2018 and a low of 92 cents USD earlier this year during the flash crash in March. The total supply of USDC has doubled since the beginning of this year, and large instances of token burnings can be seen on the chart. Of all of the fiat backed stablecoins, USDC is arguably the most promising as the next frontrunner due to its robust backing and reputation.
DAI is a stablecoin created by MakerDAO, a decentralized autonomous organization (DAO). Understanding how DAI works can be quite complicated, but the simple version of it is this: users lock up some amount of cryptocurrency as collateral (primarily Ethereum based assets) and are able to withdraw loans in the form of DAI, which is pegged to the US dollar. In other words, DAI is a stablecoin pegged to the US dollar, but instead of US dollars somewhere in a bank backing the DAI in circulation, it is backed by a portion of cryptocurrency locked in the vaults of the automated MakerDAO platform. How it maintains its peg is outside the scope of this article, but you can read more about that here.
DAI has only been on the market for less than a year but has so far seen an impressive level of price stability. Like USDC, it hit an all time high of 1.11 USD but in March of this year during the flash crash. Its all time low was only 95 cents in May of this year. Besides a few instances, DAI has remained within 1-2 cents of 1$USD. The total supply of DAI has doubled over the last year, primarily due to its utility within lending platforms and other DeFi applications. One important thing to note is that DAI is quite literally debt owed by someone to the MakerDAO protocol. This makes it a riskier stablecoin than the others, although it is nonetheless proving itself to be incredibly reliable and even beneficial during times of crisis.
Paxos Standard (PAX)
Paxos Standard is the third largest stablecoin by market cap, currently ranked as the 49th largest cryptocurrency overall. It is issued by a company called Paxos which is fully regulated by the New York State Department of Financial Services and is considered by many to be the most trustworthy stablecoin on the market. The company is extremely transparent and also allows you to redeem PAX for USD. As with USDC, any redeemed PAX tokens are burned at the Paxos treasury. Paxos also issues a tokenized version of gold called PAXG which is also fully regulated and reflects the holdings of physical gold in a Brinks vault in London, England.
Like DAI, Paxos has an excellent record of being a proper stablecoin. It has only deviated more than 1-2 cents away on a small handful of occasions, most notably during the March crash earlier this year where it dropped all the way down to 87 cents USD. In contrast to other stablecoins mentioned so far, the supply of PAX has been relatively constant over the past year. This is partially due to the fact that process of minting and burning PAX is more expensive in terms of fees than doing so with USDC (at least at the time of writing). Paxos is also the company which has partnered with the Binance cryptocurrency exchange to create their own stablecoin, BUSD.
True USD (TUSD)
TUSD is a close fourth as the largest stablecoin, currently ranked as the 54th largest cryptocurrency by market cap. The TrustToken platform which issues TUSD does so based off of assets held by regulated institutions such as banks. This makes TrustToken a sort of combination between USDT and PAX. Like PAX, TUSD is nicely regulated. However, the funds backing the existing supply of TUSD are also not necessarily US dollars. Despite this, you can in fact exchange TUSD for regular US dollars.
TUSD has not done the best job of maintaining its stability, going as high as 1.36$USD in 2018 and dropping to 91 cents USD during the March crash. The market cap of TUSD has also been quite an interesting ride, with users gradually redeeming the tokens since June of last year, followed by a sudden spike in supply last month. While TUSD appears to be quite promising as a stablecoin, it is questionable whether it will outcompete the other frontrunners any time soon. It is closely followed by Binance’s BUSD stablecoin, which has been making gradual gains since its recent release.
If you want to keep track of all of these altcoins, check out the CryptoMood mobile app! It’s free to use and brings you all of the most up to date news and social media chatter about your favorite stablecoins and over 3000 other cryptocurrencies. If you’re not a fan of mobile apps, you can use our desktop terminal instead!