What are stablecoins?
Stablecoins are a kind of cryptocurrency to offer price stability via collateralization. Their price is pegged to reserve assets such as fiat money, exchange-traded commodities, bond, or other cryptocurrencies.
The most popular stablecoins in the crypto market include Tether (USDT), USD Coin (USDC), Binance USD (BUSD), and Terra USD (UST).
As the largest stablecoin in the entire cryptocurrency market by market capitalization ($68 Billion), Tether is undoubtedly the most successful stablecoin ostensibly. However, Tether (USDT) issuing company Tether Limited and its holding company Bitfinex have had a series of scandals.
Tether was initially designed to be worth $1.00, which means maintaining $1 in reserves for each Tether issued. However, in 2017, Tether Limited stated that the owners of Tethers have no contractual right to redeem Tether (USDT) for dollars.
In 2019, Tether Limited's lawyer claimed that each Tether was backed by $0.74 in cash and cash equivalents. In May 2021, Tether published a report showing that only 2.9% of Tether was backed by cash, with over 65% backed by commercial paper. Commercial paper is not backed by collateral; it's related to issuing a company's credit rating; it is a money-market security issued by large corporations to obtain funds to meet short-term debt obligations. Therefore, commercial paper has some default risk. This proves that 65% of USDT is not based on any collateral.
In 2021, Tether paid an 18.5 Billion fine to New York Attorney General's Office since Tether's holding company Bitfinex had used Tether's funds to cover up to $850 million missing since mid-2018. And the OAG found that iFinex – the operator of Bitfinex and Tether – had made false statements about the backing of Tether and about the movement of hundreds of millions of dollars between the two companies to conceal Bitfinex's losses.
USD Coin (USDC)
USDC is pegged to the U.S. dollar, controlled by a consortium called Centre. The Centre was founded by Circle, Coinbase members, and Bitcoin mining company Bitmain.
Circle claims that each USDC is backed by a dollar held in reserve or other "approved investments," though these are not detailed. The wording on the Circle website changed from the previous "backed by U.S. dollars" to "backed by fully reserved assets" by June 2021
Currently, USDC has the fifth-largest market cap in the entire crypto market ($48.9 Billion).
Binance USD (BUSD)
BUSD is issued by Paxos, a fiat-backed stablecoin pegged to the U.S. dollar. For each BUSD, there is one U.S. dollar held in reserve. Paxos releases monthly attestations of BUSD’s reserves.
Currently, BUSD ranks 6th by market cap in the entire cryptocurrency market ($21 Billion).
Terra USD (UST)*
It is now known as TerraClassicUSD (UST). It was the decentralized and algorithmic stablecoin of the Terra blockchain. However, it lost its peg to the US dollar on May 9th, 2022, when the token dipped by 84.5% falling from past $0.9 highs on May 8th to $0.154 by May 13th. Therefore, UST was no longer a stablecoin. Now, its value is pegged at 0.03:1 to the U.S. dollar.
At present, UST ranks 107th by market cap in the entire cryptocurrency market ($291.3 Million).
Advantages of Stablecoins
First, crypto traders can use stablecoin to trade other volatile cryptocurrencies in the blockchain world. Moreover, the price of stablecoins is stable since it is stabilized by assets that fluctuate outside the cryptocurrency space. This allows cryptocurrency holders to enter the market flexibly. Furthermore, assuming they are managed in good faith and have a mechanism for redeeming the asset(s) backing them, such coins are unlikely to drop below the value of the underlying physical asset due to arbitrage.