What are stablecoins and why are they so important? Top 3 stablecoins
- what are the stablecoins?
- what types of stablecoins do we have?
- are stablecoins safe?
- what are top 3 stablecoins to buy?
What are stablecoins?
Stablecoin is an analogue of fiat money (dollar, euro) in the cryptocurrency world. If you use dollars or hryvnias for payment in the store, then stablecoins are used for payment on cryptocurrencies and fast exchange. Most stablecoins are pegged to the US dollar at 1:1. That is, for 1 stablecoin you get 1 dollar and vice versa.
Stablecoins differ from altcoins (ETH, DOGE, XRP) and Bitcoin in that they have a constant price. With the rise or fall of cryptocurrency, the amount of your money will not change if you use stablecoins.
Why do you need stablecoins?
Money is a means of rapid exchange in real life, and stablecoins fulfill the same role in the cryptocurrency market. Remember the games where you could exchange 3 pieces of stone for 1 piece of gold? Money took away the problem of conversion - it's a convenient and affordable means to buy or sell. If in the real world there is physical (bank bills) and virtual currency (bank accounts), then in cryptocurrencies such means are stablecoins, a kind of virtual dollars.
How do stablecoins work? Types of stablecoins
There are 3 types of stablecoins:
1. Stablecoins backed by fiat money. Organizations that issue these stablecoins have reserves of currency and securities that are equal to the value of the issued stablecoins. For example, if Tether printed 1 billion USDT, it should receive an additional $1 billion in dollar accounts or equivalent securities. Examples of such stablecoins are USDT, USDC, and BUSD.
2. Stablecoins, backed by cryptocurrencies. A similar principle as in the first example, but instead of dollars, cryptocurrency is used as collateral. In the case of DAI stablecoin, it uses Ether. If you know that Ethereum will rise in value and you don't want to spend it, you pledge your Ethereum and instead get more DAI (dollars) to trade or invest. That way, the company keeps your Ethereum and you use their stablecoin.
3. Algorithmic stablecoins are a type of stablecoins in which the algorithm balances the amount of cryptocurrency to which it is pegged and the stablecoin. If in the first and second case real physical or virtual reserves are created, then in the case of algorithmic stablecoins the software may or may not be created. Now I will explain the example of an algorithmic stablecoin UST, which fell by 92% to $0.08/UST.
UST is an algostablecoin with the price pegged to the main cryptocurrency and the US dollar. In the case of UST, it was pegged to Luna. You could exchange 1 UST for the equivalent of Luna. If Luna cost $100, you could get 100 UST, and for 1 UST you could get 0.01 Luna. You didn't have to post a deposit, as with other types of stablecoins, the deposit was Luna itself, the amount of which was regulated by an algorithm.
Are the stablecoins safe? Top 3 stablecoins to buy
The first stablecoin was created in 2014 and hundreds have been created since then, but I'll tell you about the 3 main stablecoins.
1. USDT (Tether). A total of 74 billion USDT was issued, 76% of which are backed by US dollars and 24% by bonds and digital assets. This stablecoin has existed for 8 years and can be exchanged on almost all cryptocurrencies. It survived 3 Bitcoin falls of 70% each - this is an important indicator of the stability of the project. For example, UST (Luna), a stablecoin with a capitalization of more than $18 billion, disappeared after the first fall of Bitcoin.
2. USDC (Circle) has 52 billion USDC, which is the equivalent of 52 billion USD which is $40 billion in U.S. bonds and $12 billion in cash. This project is younger than USDT and was created in 2018, but it has a serious background. The founders of this stablecoin are Circle, a board of which includes managers of Coinbase, the largest U.S. exchange. This is an added safety benefit because of the settlement of all processes in the U.S. and if something unpredictable happens to a stablecoin, Coinbase could lose its own reputation.
3. BUSD (Binance) – the youngest of the three, but has $18 billion to secure the stablecoin. It is used on the largest exchange Binance as the main stablecoin. The only downside of BUSD is the small number of exchanges that use it, but if you only use Binance, it's a good choice.
Each of these three stablecoins passed an independent audit and confirmed the existence of dollar reserves.
The use of stablecoins is already being transferred from virtual to real life. Cryptocurrencies issue cards in partnership with Visa and Mastercard for easy use of virtual dollars to buy food or a train ticket. The speed and ease of moving the crypto makes it possible to quickly adapt this technology to human life and stablecoins can be the first and foremost change.