Digital currencies deliver different purposes. Crypto investors often purchase coins in the hope of immediate profits. Some tokens can serve as gateways to the metaverse environment. There’s also a group of cryptocurrency projects designed to eliminate the risks of high volatility.
We’re talking about stablecoins. They bridge the world of cryptocurrencies with the ‘standard’ world of fiat currencies. The stablecoins are usually pegged to reserve assets such as gold or the U.S. dollar and reduce their price fluctuations. You can describe stablecoins as currency-like tokens that you can use in the cryptocurrency market as a medium of exchange. A stablecoin is also a commodity that can keep the value of one’s investments without exposing it to threats related to market fluctuations.
Not all stablecoins are equal, though. Some of them may fluctuate, and price stability is not always guaranteed. So before selecting a stablecoin, it’s worth researching how it works.
In this post, you will learn about:
- the common types of stablecoins,
- a list of the top three stablecoins and key facts confirming their stability.
Understanding stablecoins. Different types of stablecoin tokens
Stablecoins are collateralized in different ways. The distinct kinds of stablecoins are determined by their collateral structure. You can distinguish the following kinds of stablecoins:
- Fiat-collateralized stablecoins. This form of collateralization is the primary type of stablecoin on the market. They are backed by a fiat currency – USD, Euro, GBP, etc.and are the simplest solution on the market. One unit of a fiat-collateralized stable coin is equal to one unit of a cryptocurrency to which it is linked.
- Commodity-backed stablecoins. Those stablecoins are backed by specific kinds of interchangeable assets, for example, precious metals, real estate, and oil.
- Crypto-backed stablecoins. While this may sound misleading, there are indeed stablecoins backed by other cryptocurrencies. The main advantage of this form of collateralization is decentralization. But, do you wonder if this is safe? Well, to avoid price fluctuations, crypto-based stablecoins are often overcollateralized. You need to make your assessment if crypto-backed stablecoins are worth your trust.
- Algorithmic stablecoins. Those stablecoins don’t have the assets that could back them up. Instead, they follow an algorithm controlling their supply. When demand rises, new stablecoins are created to reduce the price; if demand diminishes, coins are purchased to reduce supply.
Top 3 stablecoins in the crypto industry
Trading platforms use stablecoins to offer an alternative for holding coins. As a result, users don’t have to withdraw money from the exchange to ensure they can maintain their profits (again, cryptocurrencies are highly volatile); instead, Web3 market participants can use a stablecoin and keep their funds on the stock exchange (in another article, you will learn about alternative and better ways to store your crypto funds).
There are also other applications of cryptocurrencies (for example, a stablecoin may be an efficient way of sending money internationally).
Which stablecoin is the best to start? Dozens of various coins are available on the market. Moreover, they support different collateralization mechanisms. You haven’t made your choice yet, as to which stablecoin to choose? Then, read on and learn about the top stablecoins on the market!
Tether (USDT)
Tether is a widely adopted stablecoin and one of the pioneers of the concept of stablecoins. All Tether tokens are pegged at a 1-to-1 ratio with a matching fiat currency and are backed 100% by Tether’s reserves. The company publicly publishes information about its reserves on the webpage. As for the 30th of August 2022, it consists of:
- 79.62% – Cash, Cash Equivalent, Short-Term Deposits & Commercial Paper,
- 5.25% – Corporate Bonds, Funds & Precious Metals,
- 6.77% – Secured Loans,
- 8.36% – Other Investments.
Tether facts
Market cap: $67.6 billion (5% of crypto market)
Volume: $45.4 billion
Circulating supply: 67.5 billion
USD Coin (USDC)
USD Coin (USDC) markets itself as a faster, safer, and more efficient way to spend money around the globe. Similar to Tether, USDC is fully backed by real-world assets. As of May 13, 2022 (that’s the freshest data available on Circle’s blog – the issuer of USDC), their reserve consisted of:
- $11.6 billion cash (22.9%),
- $39.0 billion U.S. Treasuries (77.1%)
Several other factors impact UDCS’ transparency and stability, including:
- Annual audits of Circle company,
- USDC reserve is held entirely in cash and short-dated U.S. government obligations with maturities of 3 months or less,
- USDC is always redeemable 1:1 for U.S. dollars.
USDC facts
Market cap: $52.2 billion (4% of crypto market)
Volume: $7.1 billion
Circulating supply: 52.2 billion
Binance USD (BUSD)
BUSD is a USD-backed stablecoin approved by the New York State Department of Financial Services (NYDFS). With a market capitalization of $19 billion, it’s one of the largest stablecoins on the market. The reserves backing this stablecoin are held 100% in cash and cash equivalents; thus, the customers’ funds are available for 1:1 redemption.
BUSD stablecoin was launched in 2017 by one of the biggest cryptocurrency exchanges in the world. Binance offers various other services in the Web3 world, including crypto wallets, saving accounts, and NFTs. Furthermore, as the company’s native token, Binance offers recurring promotions, lowering fees for its customers trading with BUSD.
BUSD facts
Market cap: $19.3 billion
Volume: $7.6 billion
Circulating supply: 19.3 billion
The importance of stablecoins
The cryptocurrency market is characterized by high volatility, and stablecoins were designed to ensure balance and provide more fluid ways to trade crypto coins. With roughly 200 stablecoins available worldwide and varied types of collateralized mechanisms, it’s essential to select resources that guarantee the long-term value of the stablecoins.
Pay attention to the stablecoin issuer, reserves that back a token you have selected, and its overall evaluation. Learn from different sources and be careful making your decisions. If you have not decided, consider the coins we highlighted in this article!
Sources:
https://www.binance.com/en/busd
https://www.circle.com/en/usdc
Market facts based on Coinbase data on 30 August – 1 September 2022.
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