What are stablecoins, how do they work, and why do they play a big role in the cryptocurrency ecosystem?
The cryptocurrency market is often blamed for huge volatility, i.e. fluctuating value. It can therefore be very difficult for any cryptocurrencies to be a unit of payment. This was a reason why 'stable coins' were created, i.e. cryptocurrencies the value of which is pegged to other assets, commodities and currency.
Stablecoins are linked to and covered by other state FIAT currencies. So commodities such as gold, silver and oil, and even assets such as real estate, can avoid price volatility and maintain a relatively constant value.
Stablecoins take full advantage of cryptocurrencies. They are also cryptographically secure, and easily portable between two parties without the need for an intermediary. They are also considered the holy grail of the cryptocurrency world, which can fulfill the vision of decentralized non-state money.
For investors and traders, stablecoins are a safe haven at times of market crash and downturn. So for example, if a trader expects the price of Bitcoin to fall, rather than selling Bitcoins for dollars he/she just exchanges them for stablecoins that are pegged to the US dollar.
Stablecoins on today's market pegged to the dollar
The best-known stablecoins are pegged to the US dollar, but several others have alternative underlying assets. Our app for Wexo cryptocurrencies also supports key stablecoins.
USD Tether (USDT) is the best example of a stable cryptocurrency. USDT is directly pegged and linked to the US dollar price, which it copies 1:1. It is currently the most widely used stablecoin.
Tether was created by a subsidiary of IFinex, and the market capitalization of USDT is currently by far the largest of all stable cryptocurrencies. However, it has long been questioned whether the creator of this stablecoin really covers all stablecoins in circulation with its reserves, as claimed. But a near year-long investigation by the US prosecutor's office found that USDT was undoubtedly sufficiently covered. Yet IFinex is committed to working more transparently.
Of stablecoins pegged to the US dollar, it remains necessary to mention True USD (TUSD). This was created in response to discrepancies in the coverage of USDT - the most famous stablecoin. According to available information, True USD is 100% secured by dollars deposited in bank accounts. A monthly audit of True USD enables the issuer to transparently prove that the storage of this stablecoin's holders is fully secured.
USD Coin (USDC) copies the value of the US dollar 1:1, similar to Tether. But USD Coin is less controversial, and has a slightly better reputation. Its coverage is subject to regular transparent audits. USDC stablecoin is backed by Centre, founded by Circle, Coinbase and Bitmain.
Binance USD (BUSD) ranks third in terms of stablecoin market capitalization. Although it bears the brand of the largest cryptocurrency exchange, Binance, it is published by Paxos. For example, this respected company has a BitLicence license from New York State and also works closely with PayPal. Binance USD also supports several other cryptocurrency exchanges.
Decentralized stablecoin DAI
Let's stay with the US dollar-covered stablecoins for a while. Like the stable cryptocurrencies mentioned above, DAI copies the value of USD. But in the case of DAI, ensuring stable value is handled in a decentralized way. DAI is a decentralized project, and its coverage is ensured by smart contracts linked to the Ethereum cryptocurrency. DeFi project Maker DAO is behind the stablecoin.
Stablecoins covered by alternative assets
Several companies are trying to do this with an alternative approach aimed at ensuring stable value. Stablecoin Globcoin is an interesting project in terms of approach. Its value is made up of the 15 largest currencies in the world and gold. SwissRealCoin is associated with Swiss real estate, an asset class that has historically proven to be very stable.
PAX Gold is an interesting digital asset. In the case of PAX Gold, its token represents one troy ounce of gold according to the rules of London Good Delivery. For every holder of a PAX Gold token it's like owning physical gold deposited in Paxos storage.
Digix gold tokens
Just like PAX Gold, Digix Gold Tokens (DGD) cryptocurrency value is also covered by real gold bars. Digix Global, the issuer of DGD, uses a Proof-of-Asset mechanism to prove that it really owns the gold.
The ideal is still being sought
Stablecoins bring price stability, scalability, privacy and decentralization. So all the benefits of cryptocurrency. As a result, such stable cryptocurrencies could become part of and an excellent "medium" for retailers' and consumers' everyday use. Support for the wider adoption of these stable cryptocurrencies may increase, mainly due to price stability. They currently act more as protection against volatility and a trading tool for investors.
The Wexo wallet also supports stablecoins
You can also store, send and receive stablecoins in our Wexo cryptocurrency app. In addition to standard cryptocurrencies such as Bitcoin, Ethereum, Cardano, etc., TRUE USD and Theter stablecoins are currently available, and the list of stablecoins is planned to increase. The advantage of our app for Wexo cryptocurrencies is also the ability to quickly exchange Bitcoin, Ethereum or Litecoin for a stablecoin, and vice versa. In the event of market fluctuations, you can easily protect your funds.