What are stablecoins?

Содержание

  1. What are stablecoins?
  2. Kinds of stablecoins
  3. USDT
  4. USDC
  5. DAI

What are stablecoins?

Stablecoins are cryptocurrencies that are pegged to “stable” assets like the US dollar. For example, one USDT is equal in value to one US dollar. The key difference between a "real" US dollar and a stablecoin US dollar is that the stablecoin lives in the crypto realm.

Stablecoins emerged thanks to demand from traders who wished to “lock-in” profits, by shifting value from volatile assets into stable ones. This use case remains very popular.

More recently, stablecoins have found utility as an alternative form of US dollars that, due to being cryptocurrencies that live on public blockchains, have certain advantages over "real" US dollars. For example, a growing number of businesses are using stablecoins to settle international payments more quickly and efficiently than would be possible using traditional banking infrastructure. In places where access to US dollars is limited, people are increasingly holding US dollar stablecoins as an alternative to their local currencies.

Kinds of stablecoins

There are two main types of stablecoins: centralized and decentralized.

The most widely used stablecoins are centralized. Represented by USDT and USDC - which account for roughly 41% and 34% of the stablecoin market respectively - these stablecoins use collateral-backed reserves to maintain their peg to the US dollar. In other words, for every dollar that's issued as a stablecoin, there's a corresponding dollar sitting in a bank account to back it up - and in theory, anyone can redeem their stablecoins for the underlying US dollars they represent. This parity helps to ensure that the peg isn't broken (ie. that one stablecoin dollar remains equal in value to one "real" US dollar).

Historically, centralized stablecoins have successfully maintained their peg: The value of one USDT has always been almost exactly one US dollar. However, that stability comes at the cost of trust: You must trust that centralized stablecoins are in fact backed by the reserves the company managing them purports to have.

The second most popular kind of stablecoins are decentralized stablecoins that use Collateralized Debt Positions (CDPs). In this model, anyone can voluntarily lock up crypto assets in order to be allowed to create a certain amount of new dollars - and the locked-up assets act as the collateral that backs up the new dollars (debt).

The largest of these coins is DAI, which accounts for roughly 7% of the total stablecoin supply. These stablecoins replace trust in a third-party with a trustless model, theoretically making them more resilient against outside influences such as governments. However, these stablecoins have so far proven more volatile than their centralized brethren.

We have mentioned USDT, USDC, and DAI. Let’s take a closer look at what differentiates these three.

USDT

USDT was the first stablecoin to rise to prominence. It was created in 2014 by Tether Limited, a company based in Hong Kong. USDT became popular on the Ethereum network, but it is now accessible on every major public blockchain network including Bitcoin Cash, Tron, Solana, Binance Smart Chain, Matic, and more.

Tether has a long history of controversy surrounding the actual amount of its reserves. The company claimed to be one-to-one backed by dollars, but that turned out not to be the case. However, throughout its history, which is intertwined with the crypto space as a whole, Tether has managed to weather every controversy and maintain relevance and utility.

The advantages of USDT are its ubiquity and the fact that, since the company behind it is based in Hong Kong, it is less subject to American regulatory authority. A number of international businesses, many of which aren’t even crypto-based, are attracted to this dollar-denominated currency that maintains some independence from America (much like the Eurodollar). The biggest downside is also the fact that Tether is less subject to American regulatory authority and thus many see it as less reputable and less safe.

USDC

USDC is a stablecoin created by the US-based company Circle. USDC has a much shorter history than USDT, however it has risen to prominence very quickly by addressing what some have seen as grave shortcomings in the incumbent, USDT.

USDC is mainly used on the Ethereum network, however it is available on other major networks such as, Solana, Binance Smart Chain, and Matic.

The biggest advantage of USDC is its stricter adherence to and compliance with US regulators, making holders of USDC much more confident in the long-term value of USDC. The disadvantage is that many international holders of USDC worry that US regulators might seize or interfere in their assets, as they often do in dollar markets that exist on traditional rails. These fears were substantiated in November 2020 when US law enforcement requested $100,000 worth of USDC be frozen in an account, and Circle complied.

DAI

Dai is a decentralized stablecoin with collateralization. There is no central authority that creates DAI. Instead, DAI is created, or minted, by individuals using the MakerDAO platform, which is a decentralized lending platform on the Ethereum network. People deposit collateral in the MakerDAO platform, giving them the ability to mint a certain amount of DAI.

Read more: What is decentralized finance?

Originally, only ETH was accepted as collateral, but MakerDAO expanded to include other crypto assets such as WBTC (so-called “wrapped” bitcoin, which is Bitcoin that 'lives' on the Ethereum blockchain). When Dai suffered a severe crash in mid-March of 2020, after collateralized crypto assets experienced sudden price drops, MakerDAO scrambled to secure Dai by accepting stablecoins as collateral. Now a majority of circulating DAI is backed by centralized stablecoins such as USDC.

The largest advantage of DAI is that its decentralized nature makes it more censorship resistant from governments and regulatory authorities who might, for example, wish to seize funds. This comes with serious drawbacks such as more swings in price, occasionally like the drastic one mentioned above. Finally, since a majority of DAI is backed by centralized stablecoins, some criticize DAI as being simply one step removed from the dictates of the private companies that issue those centralized stablecoins and/or the regulatory authorities that maintain power over them.

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