Steemit Crypto Academy Contest / S8W2 - What are Stablecoins?
Greetings To All |
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Hi, This is Asad Fazal from Pakistan. I hope everyone here is fine and enjoying their life to full. Today I'm here to take part in the Season 8 Week 2 contest held by SteemitCryptoAcademy Team. The topic decided by the team is What are Stablecoins?. Talking about cryptocurrencies is one of my favorite thing. I would love to share my knowledge about stablecoins and how many I hold stablecoins right now and in the past. So now without wasting time, let's start the topic!
Introduction |
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A stablecoin is a cryptocurrency whose value in the market is pegged to a reference asset such as BUSD is pegged to U.S. Dollar and USDT is also pegged to U.S. Dollar. It is not always possible that a cryptocurrency is backed by fiat money but it can be backed by exchange-trading commodities, other cryptocurrencies or real world assets like gold.
Why stablecoins are pegged to fiat money because they will not be effected by the market volatility and will remain stable by 1:1 ratio. However, there is possibilty and we have recently seen it in USDT case that stabecoin issuers have not been able to maintain the USD reserve in order to support their stablecoin.
Use your own understanding to explain what are stablecoins? And how did you manage to ensure a stable price? |
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As I have above, stablecoins are cryptocurrencies that are pegged to a reference asset. Example here is, a USDT is pegged by U.S. Dollar and BUSD is pegged also by U.S. Dollar. As their name tells, stablecoins are stable in value mean they are like 1:1 ratio and will not change it's value in the market even after high market volatility. Let's have a look at different types of stablecoins.
1. Asset-backed stablecoins:
First type is asset-based stablecoins that are backed by U.S. Dollar, fiat currency, or real-world assets like Gold. Example of this type is USDT and BUSD that are pegged to 1:1 U.S. Dollar.
2. Crypto-backed stablecoins:
There are some stablecoins that are not backed by fiat currency but are backed by cryptocurrencies like Bitcoin and Ethereum. To make the stablecoin stable in the market, the amount of cryptocurrencies and their value must be hold. Example of such stablecoin is DAI that is backed by Ethereum.
3. Algorithm stablecoins:
The third type is algorithm stablecoin or you can say non-backed stablecoin. This type of stabelcoin is not backed by any asset but their value is kept stable through algorithm and computer programs. The example of such stablecoin is UST.
4. Commodity-backed stablecoins:
Last type of stablecoins is commodity-backed stablecoins that are pegged to real world assets such as gold, silver, diamond, metals, oil, or real estate. This type of stabelcoin is getting famous because of less risk. Example of such stabelcoin is Tether gold (XAUT) and it is backed by gold reserve that is kept inside a vault in Switzerland.
However, the stablecoins can only be devalued or go down if they are unpegged. We can take example of USDT here that was unpegged in 2022 and dropped to 95 cents on most of the exchanges. This caused a great panic in the crypto market and BTC dropped to $24k level.
There are different ways a stablecoin issuer makes the value of stablecoin stable. If we take example of USDT and BUSD, their issuer needs to keep specific amount of U.S. Dollar reserves for every USDT or BUSD they issue. If the price of stablecoin goes down, they have to burn some to get them stable. Likewise, if the price increases, they have to issue more stablecoins to keep the price stable. It is a continues struggle to make stablecoins stable.
These two methods are mostly used by stablecoins issuers that are buring or issuing new stablecoins in the market. The overall result is to manage the supply in the market to keep it's value 1:1 to it's reference asset. Otherwise, the stablecoin can make the whole market down due to panic in the market and no trust towards that issuer.
Why were stablecoins created and how are they useful? |
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The main purpose and creation of stablecoins is high volatility in the market. Stablecoins came as an alternative to high volatility cryptocurrencies such as BTC, ETH, BNB, etc. Stabelcoins keeps their value stable but during transaction BTC or other cryptocurrencies can change their value within no time. This makes the loss or gain during transaction so that is the reason why stablecoins were needed in the market.
We all know stablecoins are backed by a reference asset such as U.S. dollar, exchange-traded commodities, other cryptocurrencies, gold, or fiat currencies. To achieve the stability of them, the issuer needs to manage a specific amount of reserve in the back to keep value stable.
There are various uses of stablecoins, first one is they let users to keep money in stable form just like fiat currencies. If we do exchange fiat currencies in local currency, their value may change but that is another case or topic. Second use of stablecoins is they are paired with other cryptocurrencies to be traded in the market. Like we can do trade of BTC/USDT, BTC/BUSD, ETH/USDT, ETH/BUSD, etc. Below are some main uses of stablecoins:
1. Safe Assets
Unlike other cryptocurrencies, stablecoins have their value equal to $1 and they will not change much that means they will always be near $1. Maybe they change 1 or 2 cents up or down but will not go further up or down. This feature makes the stablecoin a safe investment or holding if the crypto market is highly volatile.
2. Transaction
Second use of stabelcoin is in transaction. Let suppose, you are sending 1 BTC and it's value is $24k and during sending, it value changed to $23,800. It means you have lost $200. But if you have $24k in stablecoin, it will remain $24k no matter when you will do transaction. So yes stablecoins give much more benefit than other cryptocurrencies in terms of transaction.
3. Remittance
Overseas people find it really difficult to send money to their home if there is shutdown or any problem. Moreover, sending money from one country to another costs a lot because of high fees. Stablecoins are solution here with lowest possible fees and instant transaction.
4. Trading
Fiat currency costs a lot during trading because of high fees. To cover up, stablecoins were introduced that are trading in pair of cryptocurrencies and in low fees. For example, if you trade BTC in BUSD pair on Binance, you will have to pay no or very little fees. I personally do trading in BUSD pair and 80-90% of the trades are without fees on Binance but in BUSD pair only.
What are the most popular stablecoins? Which do you use more and why? |
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The most popular stablecoins in 2023 are USDT, USDC, BUSD, and TUSD. All of these stablecoins are pegged to U.S. Dollar and they are currently stable to 1:1 ratio. They look similar but all of them have different technology used behind and are different from each other. Let's have a look at each of them one by one.
1. Tether (USDT): Tether is the mostly used stablecoin and is ranked on 1st in stablecoin category and 3rd according to market cap of all cryptocurrencies. It is widely used in all cryptocurrency exchanges and currently have marketcap of $71,482,522,823.
2. USDC: Second most famous stablecoin is USDC that is also pegged to U.S. Dollar. It is currently ranked 2nd in stablecoins category and 5th in overall cryptocurrency marketcap. It has a marketcap of $43,910,289,654.
3. Binance USD (BUSD): Third and my favorite stablecoin is Binance USD that is currently the safest stabelcoin I know. It is also pegged to U.S. Dollar and as per claims of CZ Binance, they have proper reserve for backing their stablecoin. It is currently ranked on 3rd in stablecoin category and 10 in overall market. It has a marketcap of $8,692,807,686.
4. TrueUSD (TUSD): Fourth stablecoin is TUSD that is also pegged to U.S. Dollar. I have never used it before and reading about this stablecoin for the first time. It is currently ranked on 5th position in stablecoin category and 42 in overall market in terms of marketcap. It has current marketcap of $1,165,737,258.
My Personally Used Stablecoins
I personally use and love BUSD and USDT. I have not yet used any other stablecoin and last time I traded Steem was also in BUSD. You can see that in the screenshot below. Why I trade in BUSD is because of no fees I need to pay and second is trust on Binance exchange I have. I know there are many issues going on of the exchange but still I think CZ Binance will clear all allegations on him and his exchange.
Screenshot taken of Binance
Can stablecoins lose their stability? If the answer is yes, then cite some cases with an explanation of the reasons of that. |
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Yes, it is possible that a stablecoin lose it's stability. We all know stablecoins are designed in such a way that they need to stay stable by 1:1 ratio in respect to their reference asset such as U.S. Dollar for USDT and BUSD. This can only be managed if the stablecoin issuers have reserves with tangible assets such as fiat currency, gold, or exhange-traded commodities.
However, it is possible a stablecoin lose it's stability. The main reason for it is lack of transparency and management. Suppose if the issuer has not equal reserve for his stablecoin and they are hiding it from public and authorities, then investor may lose confidence in that stablecoin and thus starts withdraw of their investment from stablecoins which makes it value down that means it is unpegged to it's reference asset.
If a stablecoin is backed by a cryptocurrency like Ethereum, Bitcoin or any other. It is also possible that stablecoin lose it's value and stability during high volatility in the market. To cope with this, more amount of backed cryptocurrency needs to hold by the issuers.
There have been many cases in the crypto world when stablecoins lose it's stability and value. The most famous one was USDT that causes extreme panic in the market and that's why BTC was dropped to $24k level. Let's talk about them in detail.
Image taken from Freepik
Tether (USDT): As we know Tether is a stablecoin that is pegged to U.S. Dollar that means it is backed by USD and issuer makes it stable by keeping USD in reserve. But few days back, it came into highlight that Tether has not all USD that it required for backing the USDT. In 2018, USDT lose it's value and stability during rumors that are issuers have not enough assets (USD) to cover the issuance of all USDT. This cause panic in the market and the investors lose confidence in it and started converting to other stablecoin which dropped the value of USDT temporarily.
DAI: Another case was of DAI stablecoin that is backed by U.S. Dollars as well as cryptocurrency Ethereum (ETH). In March 2020, DAI lose it's stability during the cryptocurrency market volatility. But the drop was was temporarily and the developers did required actions to make it stable again. The developers sell large amount of their ETH holdings to back their stablecoin which cause ETH price drop of a sudden. It caused a lot of panic in the cryptocurrency market over the world.
What are the advantages and disadvantages of stablecoins compared to traditional cryptocurrencies? |
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Just like every digital and real-world things, there are advantages and disadvantages of them. Same is with stablecoins, there are many benefits and also there are harms/disadvantages of using them as compared to traditional cryptocurrencies. Let's look at them each one by one.
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Advantages of Stablecoins
- Less Volatility is the main benefit of stablecoins. They are good to hold if you are not in favor of high volatility in the crypto market. We usually get into stablecoins when other crypto coins are either in extreme bull or bear conditions.
- Stability is another benefit that means the stablecoin will remain stable no matter how high the volatility is in the crypto market. They are more stable than traditional cryptocurrencies.
- Liquidity increased by stablecoins than traditional cryptocurrencies in the market. The reason is they are easy to exchange to other cryptocurrencies and fiat currency and money.
Disdvantages of Stablecoins
- Unpegging is the issue in stablecoins. It means if the issuer is not able to maintain the reserve or backed asset, then the stablecoin can be unpegged means it will lose it's value and stability.
- Centralized control is another disadvantage that makes it risky cryptocurrency. It means the stablecoin is being controlled by a third entity that makes the issue of transparency and security.
- Less Options available in stablecoins than traditional cryptocurrencies. It means there are few stablecoins and if 2-3 gets unpegged then the whole market can be collapsed and user will have not much option to convert to or maybe he withdraw all money to his bank.
Conclusion |
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Stablecoins is the best alternative to the traditional cryptocurrencies because of it's number of benefits. They help users to stay safe from the high volatility of the cryptocurrencies. They were created also to fill the gap between traditional finance and currency crypto world so that more and more people join crypto world and be part of the advance technology. However, there are still some risks involved with stablecoins and I think they will soon be solved as the time goes.
This is all from me for the "Steemit Crypto Academy Contest / S8W2 - What are Stablecoins?". I invite @samminator, @malikusman1, @steemdoctor1, @simonnwigwe, @preye2, @lavanyalakshman, and @theentertainer to participate in this contest and share what they know about stablecoins and their favorite one in the market.
Thank You For Reading
Hey @chasad75, I just finished reading your post on Steemit about stablecoins, and I have to say, it was really informative! Your explanation of stablecoins was really clear and easy to understand, and I liked how you went into detail about the different types of stablecoins available. Your breakdown of the advantages and disadvantages of each type was really helpful, and I appreciate how you highlighted the importance of stablecoins in the crypto world.
Thank you brother for sharing your view of my post 💕
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Thank you, friend!
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This is a very detailed contest post, I wonder if I can stand a chance against you 😃😃.
I really enjoyed going through your post, you have met all the criteria needed for this challenge and you have answered all questions as it should be.
You gave your understanding of a stable coin which is expected of you, you went further to give the different types of stablecoin we have.
From your post, I realized that we posses three types of stablecoin, the algorithm backed stablecoin, the crypto-backed stable coin and the asset backed stablecoin.
I believe it took hardwork on your side to give this clear explanation.
Overall z you have done very well, it all lies in the hands of the judges, I wish you the very best bro 😊😊
Thank you for appreciation. I always try to deliver best I can but still there are some gaps left. Thank you again 💕
You are really trying, keep up the good works 🤍
Efectivamente, la definicion de stablecoins coincide tal cual como su nombre lo indica, mantener su valor estable pese a las fluctuaciones del mercado. Asi como la ventaja sopesar la volatilidad, el volumen de liquidez, entre otras; también el esquema centralizado constituye una gran desventaja. Exito en tu excelente participación!
Gracias @mariami por tu valioso comentario. Yo aprecio :)
you write very well, you have huge information about stablecoins
thankyou for sharing
Thank you for your comment :)
I love the way you have carefully presented your article it's quite admirable I mean overall on the issue of stablecoins you have written a great post.
And just like you mentioned one problem or disadvantages of stablecoins it's depeging I mean most of this stablecoins lie about their reserves which put them at great risk in an event of a huge whale dump placing them at a risk of being deppeg so to speak.
Great piece 👌
Thank you for sharing your view of my post :)
sí, LUNA fue la caída más grande que he visto durante mi comercio de criptomonedas. Nunca había visto tal accidente antes. Espero que nunca vuelva a aparecer en ninguna moneda. Sí, es bueno permanecer en monedas estables en alta volatilidad porque necesitamos asegurarnos porque nadie vendrá a salvarnos. Gracias por tu valioso comentario :)
Actually your article is explained in detailed and very easy for anyone who reads it to understand.
This type of stable coins seem to be the ones which i will say maintains it stability the most. This due to how it works, that’s with algorithms and computer programs which are very accurate. Indeed i have really learnt a lot from your article, good luck to you buddy.
Thank you @habdallah for reading my article and leaving feedback. I appreciate :)