You’ve likely heard the term being thrown around the crypto community. Stablecoins are a permanent fixture on the scene and we’re going to tell you why in this comprehensive rundown of what are stablecoins, including a look into what keeps stablecoins stable. Whether you’re an avid crypto trader or new to the crypto world, stick around as we unveil the next chapter in understanding the industry as a whole.
What Are Stablecoins?
A more recent addition to the crypto industry, stablecoins are digital assets that are pegged to a reserve asset. These coins bypass volatility in favour of remaining the same value as the reserve they are pegged to. So while stablecoins are still built using blockchain technology, they do not operate with the same supply / demand economic values that many other cryptocurrencies do.
There are also three main types of stablecoins, one is backed by fiat, one is backed by a commodity while the last is backed by cryptocurrencies. The most popular options are certainly the fiat and commodity backed stablecoins, many of which are pegged to the value of gold and the US dollar.
Many individuals entering the cryptocurrency industry to take advantage of the volatility and looking to make returns might not be immediately drawn to the world of stablecoins. However, these coins provide a valuable hedge when markets take a turn for the worse. They also provide a “soft landing” entry point for those that would like exposure to the cryptocurrency and blockchain industry but want to err on the side of caution. Their value remains stable however they still tap into the advantages of fast cross border payments and reduced fees.
What Keeps Stablecoins Stable?
Looking at fiat and commodity backed stablecoins, generally the company would be responsible for having a 1:1 ratio of reserves. A third party would then be responsible for auditing the firm, ensuring that the correct amount of stablecoins enter circulation relevant to the amount of reserves they are holding. For example, for a fiat backed stablecoin the company issuing the token would need to have $10 million in reserve in order to issue 10 million tokens, each worth $1.
For the cryptocurrency backed options, these are typically controlled through the use of smart contracts as opposed to a central issuer. For these coins, a user would need to lock their cryptocurrency into a smart contract in order to be issued the stablecoin of the same value. When looking to withdraw the original cryptocurrency, users can send their stablecoins to the smart contract and the funds will be released. Typically these coins incur a collateralized ratio in order to protect against market volatility.
List Of Stablecoins
Now that we understand what stablecoins are and how they are backed, let’s explore some real world examples. Over the 2020 - 2021 period the stablecoin market has grown to nearly 3 times its initial value, with stablecoin interest on the rise now is as good a time as any to understand.
Fiat Backed Stablecoins
- USD Coin (USDC)
Alongside regulated financial institutions, the Centre Consortium issues USDC based on a 1:1 ratio with the US dollar. Each coin is worth $1, and for each coin issued $1 is held in reserve, either through cash or short-term U.S. Treasury bonds.
- Tether (USDT)
Issued by the Hong Kong-based company Tether, USDT is also backed by the US dollar and reserves are held reflecting the circulating supply. There was some controversy several years ago with regard to the company’s reserves, however the stablecoin remains a popular option and is currently ranked the largest cryptocurrency in terms of market cap.
Commodity Backed Stablecoins
- Pax Gold (PAXG)
Issued by Pax Standard (PAX), a reputable American company, Pax Gold is a stablecoin backed by gold. Each PAXG token represents one troy ounce (31.10 grams) of a London Right Delivery bar of gold with the reserve stored safely in the trusted vaults. Each holder of a token receives full ownership of the gold, and can trade the commodity worldwide through a number of crypto exchanges.
- Tether Gold (XAUT)
Operated by the same Tether company mentioned above, this stablecoin is pegged to the price of gold. The stablecoin can be traded on Ethereum and TRON blockchains, with each coin holding the value of a single troy ounce of gold based on one London Good Delivery bar of gold. The reserves are kept in a Swiss vault and the unique serial number for each bar is shared with the holder of each token.
Crypto Backed Stablecoins
- Dai (DAI)
Dai is one of the first examples of decentralized finance (DeFi), an industry that is now valued at over $105 billion. Users looking to onboard and borrow Dai would need to deposit ETH into the smart contracts maintained and regulated by MakerDAO. These smart contracts require a 150% collateral, meaning that one would need to deposit 150 ETH in order to get 100 DAI. Should the price of ETH fall below this amount, the smart contract automatically liquidates the deal. Should it rise, users are able to borrow more Dai.
Stablecoins Might Be Predictable, But They Still Hold Value
Now that you understand what stablecoins are and have a better idea of what keeps stablecoins stable, you might look to incorporate several into your portfolio. While the gold backed stablecoins can grant you ownership of actual gold (no matter where in the world you might be), fiat backed cryptocurrencies hold as much value in turbulent markets. Oobit allows users to onboard several of the stablecoins listed above, as well as store and manage USDC from your personal account. With assets stored securely and onboarding crypto effortless, build your portfolio with Oobit today.