Cryptocurrencies are usually identified by many features, such as blockchain technology, a decentralized network, and high market volatility. These digital assets are always on the move, generating high profits for investors as well as severe market losses in a matter of days.
Stablecoins are a type of digital asset created to be immune to this ravaging volatility of the cryptocurrency market. These coins allow people to enjoy the benefits of cryptocurrency without worrying about any potential price change – negative or positive.
In this piece, we shall discuss what stablecoins are, the types of stablecoins, the pros and cons of stablecoins, and the stablecoins list for 2022.
What is a Stablecoin?
A stablecoin is a cryptocurrency, the value of which is pegged to a traditional currency, commodity, or financial instrument. They are primarily designed to limit the volatility in the crypto market by having a fixed market value.
Crypto Volatility- Stablecoins to the Rescue
The cryptocurrency market’s volatility is no news to investors and the world. While cryptocurrencies have experienced widespread adoption in recent years, there remains a persistent concern about the frequent and unpredictable market movement of these tokens – which sometimes results in drastic losses for investors. This dilemma led to the creation of stablecoins.
Stablecoins are cryptocurrencies with a fixed market price. These coins usually have their value pegged to a fiat currency or commodity. To maintain this fixed value, most stablecoins are usually backed with collateral which can be national currencies, other crypto assets, or hard assets.
Since the invention of the first stablecoin cryptocurrency in 2014, this unique crypto asset has garnered much attraction, attaining insane adoption levels. Currently, there are about 200 stablecoins in the crypto world, with a total market capitalization of $153.13 billion, representing 14.68% of the entire cryptocurrency market.
There are many reasons behind the popularity of stablecoins. For example, stablecoins run on blockchain technology like other cryptocurrencies; thus, they present benefits such as high transaction speed, borderless payments, network anonymity, etc.
Their price stability, combined with the merits of blockchain technology, makes them a preferred asset to other cryptocurrencies for the payment of goods and services in the real world.
Furthermore, many traders have adopted stablecoins as a safety measure during extreme market volatility. They convert all their crypto assets to stablecoins while waiting for the market to gain some stability. In addition, stablecoins are profitable lending assets capable of generating interests as high as 20% for investors.
Types of Stablecoins
Stablecoins are grouped into different categories based on the type of asset that supports their price stability. The following are the types of stablecoins :
Stablecoins Backed by Commodity
These are stablecoins whose value is pegged against hard assets such as gold or real estate. Gold metal is the most popular hard asset used as collateral for stablecoins. Other precious metals that serve as support for stablecoins include silver, platinum, and palladium.
Stablecoins Backed by Crypto Assets
Some stablecoins are backed by crypto assets. The collateral in these cases can include other stablecoins as well as regular volatile cryptocurrencies. To safeguard against losses due to market volatility, the stablecoins in this category are always overcollateralized. This means the value of the collateral assets is always more than the value of the circulating supply of stablecoin.
Stablecoins Backed by Fiat Currency
This is the most popular type of stablecoins in the market. As the name implies, they are backed by fiat currency deposits held in traditional banking institutions. The US dollar is the most common fiat currency used as collateral for stablecoins. Other collateral currencies include Euro and the Chinese Yen.
Stablecoins Backed by Seigniorage
These are stablecoins whose price stability is maintained by an algorithm. In their purest form, these tokens are non-collateralized and are entirely decentralized. Every operation of the stablecoin is regulated by an algorithm that sets the supply, demand, and target price.
Stablecoins List: Top Picks for 2022
While stablecoins are known to have a fixed value, not all stablecoins have equal quality. Investing in credible stablecoins that are well-protected and capable of retaining their value is important. Here’s our stablecoins top pick for 2022 (in no particular order):
#1 – Tether (USDT)
Tether is the most traded stablecoin in the market. Tether was launched in July 2014 as RealCoin by Tether Limited Inc and rebranded as Tether in November 2014. Initially deployed on the Bitcoin blockchain, Tether is now operational on several other chains, including Ethereum, Algorand, TRON, EOS, Solana, OMG Network, and Bitcoin Cash.
At the time of writing, Tether has a market cap of $67 billion+, making it the biggest stablecoin and third most prominent cryptocurrency, just after market Titans, Bitcoin, and Ethereum. Tether’s value is pegged to the U.S Dollar, i.e., 1 USDT equals 1 USD.
Furthermore, it is an asset-backed stablecoin. However, there is little information on the composition of its collateral assets. According to the coin’s official website, “Tether is backed 100% by Tether reserves.” Aside from regular transactions, Tether is commonly used for leverage trading to avoid losses from market volatility.
#2 – Dai (DAI)
Dai is a crypto backed stablecoins issued by the MakerDAO, a DeFi lending protocol built on the Ethereum blockchain. Dai is the first decentralized stablecoin generated and controlled by its users.
Dai is not backed by any commodity or fiat currency. Instead, it receives its backing from the crypto collateral on MakerDAO. To further explain, Dai is minted only when investors deposit their assets as collateral to borrow from the MakerDAO.
Because of its multiple crypto asset backing, Dai is considered a highly-secure stablecoin. Like USDT, Dai’s value is also matched at a 1:1 ratio to the U.S Dollar.
It is also worth noting that Dai is an ERC-20 token and can be integrated into several decentralized applications. Another benefit of Dai is the Dai Savings Rate (DSR), which allows users to lock up Dai in the DSR smart contract and earn interest on their tokens.
#3 – Binance USD (BUSD)
Binance USD (BUSD) is the native stablecoin of Binance, the largest crypto exchange in the world. It was launched in 2019 in collaboration with Paxos, a blockchain company that offers asset tokenization services.
The Binance USD runs on the Ethereum network and is issued by Paxos. Like most stablecoins, its value is equivalent to the U.S Dollar. Reserves back this stablecoin in the form of US Dollar deposits in FDIC-insured banks or U.S Treasury bills.
Furthermore, BUSD is approved by the New York State of Financial Services, contributing significantly to the stablecoin’s validity. Because it is an ERC-20 token, Binance USD is used on various decentralized applications. It is also the most commonly used stablecoin on the Binance exchange.
In addition to BUSD, there is the Binance-Peg BUSD token on the BNB Chain. The BUSD (BEP-20), as it is known, holds the same value as the Binance USD. However, the BUSD (BEP-20) is solely a Binance product and is not issued by Paxos, nor does it have the same regulatory approvals as the Binance USD.
#4 – USD Coin (USDC)
USD Coin was launched in 2018 by Circle, an independent-member consortium founded by the Coinbase exchange, and Circle, a peer-to-peer payments technology company. As the name implies, USDC is one of the stablecoins pegged to the value of the U.S Dollar.
Furthermore, USD Coin is a highly prominent asset with a current market cap of $51 billion+, making it the second largest stablecoin after Tether. It is also a fully reserved stablecoin, as each token is backed by U.S Dollars cash and short-dated U.S treasury bills that are easily redeemable.
The USD Coin is an ERC-20 token commonly used in DeFi solutions. In addition, it also promotes interoperability as it is compatible with multiple blockchains, including Ethereum, Algorand, Solana, Stellar, and TRON.
#5 – TrueUSD (TUSD)
TrueUSD is the first regulated stablecoin tied to the US dollar. It is an Ethereum-based asset launched by the TrustToken Platform. TUSD is reputable in the market for its reliability and transparency.
All TrueUSD tokens are backed by dollar holdings spread across several FDIC-insured bank accounts owned by multiple trust companies. These bank accounts also undergo a monthly audit in which all collateralized holdings are published.
Furthermore, TrueUSD employs multiple escrow accounts to decrease counterparty risk and protect its users against fraud. That said, it is also worth noting that all TUSD users are subject to the mandatory KYC laws of the company.
TrueUSD is commonly used for trading and is accessible on 70+ exchanges. In addition to this TUSD, TrustToken has launched other stablecoins, including TrueCAD, TrueAUD, TrueHKD, and TrueGBP.
#6 – Pax Dollar (USDP)
Pax Dollar, formerly known as Paxos Standard, was launched in 2018 by Paxos. Like the BUSD, USDP is approved by the New York State Department of Financial Services, making it a well-favored stablecoin by crypto investors. In fact, it was one of the first virtual currencies to be awarded a Trust Charter by the U.S financial regulator.
Furthermore, Pax Dollar is an ERC-20 token redeemable 1 for 1 with the U.S Dollar. All major operations of this asset are managed by smart contracts on the Ethereum network. The USDP is backed entirely by US dollar reserves held in U.S depository institutions and managed by Paxos.
Pax Dollar is suitable for use across the Ethereum ecosystem. It is also a widely accepted digital currency, integrated with several payment systems, including PayPal, the world’s most valuable payment platform and a verified partner of Paxos.
#7 – USD Digital (USDD)
USD Digital is one of the newest and best stablecoins in the cryptocurrency market. It was launched in May 2022 by prominent blockchain platform Tron. USDD is an algorithmic stablecoin whose value is pegged 1:1 to the US Dollar.
The USD Digital is a multi-chain asset that utilizes the BitTorrent cross-chain protocol. Aside from the Tron network, this stablecoin can be used on the Ethereum and BNB chains.
Recently, USDD has come under market scrutiny due to the crash of another popular algorithmic stablecoin, TerraUST (UST). However, Tron claims that USD Digital is immune to such market fate.
Unlike other algorithmic stablecoins, which are decentralized and uncollateralized, Tron states that USDD is an overcollateralized asset backed by a collection of stable and volatile cryptocurrency assets.
#8 – Neutrino USD (USDN)
The Neutrino USD was unveiled in 2019 by Waves blockchain. It is an algorithmic stablecoin created via the Neutrino protocol – an algorithmic protocol for the creation of stablecoins. Asides the Neutrino USD, other Neutrino stablecoins include Neutrino EUR (EURN), Neutrino CNY (CNYN), Neutrino JPY (JPYN) and so on.
Neutrino USD is pegged with the U.S Dollar and backed by WAVES – the native token of the Waves network. These WAVES tokens are locked in smart contracts, and their stability is ensured via NSBT – the governance token of the Neutrino protocol.
The Neutrino USD is a staking asset capable of generating high user returns. It is also used for payment on Waves-based applications, including DAO and WaveFlow. In addition, USDN exhibits interoperability and runs on the Ethereum and BNB chains.
#9 – Gemini Dollar (GUSD)
The Gemini Dollar is issued by the Gemini Trust Company LLC. GUSD was released in 2018 and is one of the stablecoins regulated by the New York State Department of Financial Services.
Gemini Dollar is an ERC-20 token built on the Ethereum blockchain. It is pegged to the U.S Dollar and backed by US Dollar reserves held by the State Street Bank and Trust Company. GUSD is well-known for its transparency and compliance with the traditional financial system regulating fiat currencies.
The Gemini Dollar also undergoes a monthly audit conducted by independent accounting firm BPM. This audit guarantees that the GUSD in circulation is equal to the U.S Dollar reserves.
Gemini dollars can be used for trading and business transactions. Investors can also utilize their GUSD on lending services to earn interests as high as 9% per annum.
#10 – Tether Gold (XAUT)
Tether Gold was released by Tether in 2020 and is the world’s leading gold-backed stablecoin. XAUT is available as an ERC-20 token on Ethereum and TRC-20 on Tron. The token is issued by TG Commodities Limited.
Tether Gold allows investors to own gold without having to endure concerns such as security or high storage cost. One XAUT token equals an ounce (31.1g) of gold on a specific gold bar. Each gold bar has a unique serial number, purity, and weight. Tether gold investors can always confirm the details of their respective gold bars via the Tether website.
All Tether Gold tokens are redeemable for physical gold that can be delivered only to Switzerland. Alternatively, XAUT holders can direct TG Commodities to sell their gold and receive cash instead.
Pros of Stablecoins
Stablecoins are cryptocurrencies with the full benefits of blockchain technology. These coins have fast settlement times and can be used for cross-border transactions. They are also easy to access, like the traditional cryptocurrencies on exchanges, and are stored with crypto wallets.
No market volatility
The most significant advantage of stablecoins is their ability to maintain a fixed price level (all things being equal). This particular feature is essential to the numerous investors worldwide who wish to have crypto investments safe from market volatility.
Hedge against falling markets
Due to the nature of stablecoins, market traders commonly use them to hedge against other cryptocurrencies in a falling price market.
Cons of Stablecoins
Unlike most regular cryptocurrencies that are fully decentralized, most stablecoins are issued by a centralized organization that exhibits significant control over the currency. Most stablecoins also have their collateral assets managed by a single authority.
No price growth
With stablecoins, there is no expected price growth. Investors do not record any profit by keeping stablecoins in their portfolio because of their pegged-price nature.
Fear of asset loss
This is associated mainly with Seigniorage-backed coins. As experienced earlier this year with the TerraUSD(UST), algorithmic coins can collapse. In such scenarios, investors are likely to lose their investment as there is usually no collateral backing for such coins.
On a final note, it is pretty clear that stablecoins are here to stay. These digital assets have the massive potential to accelerate cryptocurrency adoption as they allow individuals to explore the market without fears of price volatility.
One could already think they have fiat USD stored up in their wallets.
With their “stability” and ever-growing demand, stablecoins look set to play a vital role in bridging the gap between cryptocurrency and the traditional economy.