Stablecoins basics and reasons to invest in them
Most of the world is already aware of what cryptocurrencies are and what the blockchain is capable of but there are still a few rough edges that need to be polished. One such topic that deserves a deep exploration is the concept of stablecoins. What is it and how does it differ from other digital assets? Here are the basics of stablecoins and why you, as a crypto trader, should invest in it or its infrastructure.
What is a stablecoin?
A stablecoin is a type of digital asset that runs on a blockchain just like other cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH). The main difference is it’s designed to eliminate or minimise volatility. Stablecoins are still affected by supply and demand but they are usually pegged as collateral to always stay at a certain value.
Stabilising a digital asset’s price opens many advantages that used to be mutually exclusive to fiat and crypto. It benefits from blockchain network’s borderless, cheap, and reliable peer-to-peer (P2P) payment system using the best crypto wallets. Since its price is stable unlike other crypto, its acceptance is as wide as fiat currencies, making it easy to liquidate and use as mode of payment.
A good way to measure the differences fiat has over fiat and conventional crypto is how it’s used at online services like Sportsbet betting. Fiat is handled by banks, forcing bookmakers and other businesses to conduct a know-your-customer (KYC) protocol where they ask for personal information. Cryptocurrencies like Sportsbet Bitcoin, on the other hand, can keep you anonymous but liquidating it on markets can take a while.
This happens because of how everyone in an exchange has different prices for how much they want to buy or sell it relative to market trends. Stablecoins are decentralised, letting you stay anonymous for most services, and liquidating an exchange is as easy as withdrawing cash. On top of that, it foregoes conventional banking limits thanks to blockchain’s more accurate validation system. This gives you full control and security responsibility over your crypto.
How do stablecoins work?
Stablecoins are designed to maintain its value, usually pegged on another asset or currency. How that’s done depends on what kind of structure is used. There are three ways that a stablecoin works and each one is meant for different intentions for the cryptocurrency.
Fiat-collateralised stablecoins
This is the type of stablecoin that is backed by a reserve of fiat currencies held in the blockchain developer’s bank. The most popular currency used for this system is the United States dollar (USD) because it’s the most universally accepted currency. Other popular examples were the euro (EUR), British pound sterling (GBP), and Chinese yuan (CNY).
The most straightforward way to handle this is to mint many stablecoins as there are of the pegged fiat in the developer’s bank. That means there will be a 1,000,000,000 circulation limit for a USD-pegged stablecoin if there are only $1,000,000,000 in the reserves. Wiser finance experts, however, will store different kinds of fiat as the collective reserves and the maximum circulation becomes its total worth in the pegged currency. This is what Tether (USDT) did.
Crypto-collateralised stablecoins
This type of stablecoin works similarly but backed by crypto like BTC and ETH. Unlike fiat-collateralised digital assets, this one always has more than one type of crypto as peg. The value is typically measured in either USD or EUR because they’re used most commonly for liquidation purposes.
One main advantage crypto-collateralised stablecoins have over other assets is how they can be liquidated immediately into any crypto used to back them. Bitcoin and Ethereum are two of the most popular assets but they’re not usually easy to trade between each other. However, it’s easier for traders from both blockchains to see eye-to-eye when trading mutually-backed stablecoin.
Algorithmic stablecoins
Unlike the previous two, this stablecoin is not backed by any underlying assets. Its price is still pegged to a specific currency like the USD or EUR to keep the crypto easy to liquidate to any of those fiat. Rather than changing its value, an algorithmic stablecoin uses a series of market mechanisms and smart contracts to change its number of supply in circulation.
The supply pool can shrink and expand at any given moment in an attempt to keep the crypto’s value exactly the same as the pegged currency. Both fiat- and crypto-collateralized stablecoins are used for borderless banking services that many corporations use. Algorithmic stablecoins are more ideal for loan platforms. It helps both lender and borrower keep track of their loans’ price changes with inflation and interest rates included.
What are examples of stablecoins?
Stablecoin technology has been around for a long time and there have been plenty of examples introduced over the years. Some are more popular than others because of how widely-accepted they are. The more obscure ones are typically part of decentralised apps (dApps) with niche uses but the ones below have a big presence in the crypto industry.
Tether (USDT)
USDT is a fiat-collateralised stablecoin fully backed by the USD and is one of the first of its kind to standardise its use in the global market. Its initial objective is to be a store of value for global banking using its borderless network. Unlike most crypto, the Tether blockchain is centralised, meaning it is issued and managed by Tether Limited Incorporated. Tether is the top stablecoin by market capitalization and has a wide use case like Bitcoin thanks to its involvement in various industries.
Dai (DAI)
Most who don’t like USDT’s centralised system opt for the next best stablecoin. That would be Dai (DAI), a cryptocurrency built on algorithmic price stabilisation using collateral by depositing Ethereum or other supported crypto in a smart contract. This becomes the user’s means of payment to get Dai tokens which are pegged to the USD. It is a fully decentralised and transparent stablecoin whose systems are governed by the decentralised autonomous organisation (DAO). This is a collective of Dai holders who discuss, manage, and make decisions through consensus rather than a single entity.
Binance USD (BUSD)
Binance is one of the largest crypto exchanges in the world and they issued Binance USD (BUSD) as a fully centralised stablecoin. It serves the same functions as USDT but its uses are more focused on trading within the cryptocurrency ecosystem. This made liquidation of various cryptocurrencies like BTC and ETH easier. The stablecoin is affiliated with Binance but BUSD is available on all of the top exchanges like Kraken, bitMax, and DigiFinex.
Euro Tether (EURT)
Tether Limited Inc. is mostly known for their USD-pegged crypto but they also have Euro Tether (EURT). It works exactly the same but it’s targeted towards users and marketplaces where EUR is favoured over any other currency. The EURT circulates the same blockchain as USDT and are available on the same exchanges and brokerages.
USD Coin (USDC)
This coin is a joint venture between finance technology company Circle and digital currency exchange Coinbase and is issued by the Centre Consortium. It serves the same function as both USDT and BUSD where it’s a store of value as well as a mode of payment for multiple platforms. Although it’s centralised, USDC is favoured more than its contemporaries because of its regular third-party audit. Transparency is valued for fiat-collateralised stablecoins like USD Coin because users want reassurance that there are enough money reservers to back the assets.
Take away
Stablecoins have complex infrastructure designed to keep their value absolutely close to the asset they are pegged to. As a user, it’s only as simple as using these cryptocurrencies for trading and banking the same way you would use any other crypto or fiat. They’re great for liquidation and borderless transactions as well, making them quickly accepted by many services like Sportsbet betting.
Sportsbet is a great example of an online platform with full support for the most widely-used stablecoin, USDT. It’s one of many accepted payments for betting, allowing you to play casino games at rates similar to the US dollar rather than with Sportsbet Bitcoin denominations. The latter has its appeal but many newcomer gamblers are more likely to feel more comfortable using familiar currencies’ value.
FAQ
Here are some of the frequently asked questions about stablecoins:
What is a stablecoin?
A stablecoin is a type of cryptocurrency with value that stays as close to a pegged asset as possible. Tether (USDT) is a great example. It’s circulating the blockchain like the Bitcoin (BTC) but it always stays 1:1 with the United States dollar. Thus, it is more popular for payment and remittance but not for hodling.
What is the benefit of owning stablecoins?
Stablecoins are crypto, allowing them to benefit from the borderless and reliable money transfer services of the blockchain network. Since they are pegged to fiat, they are easier to accept as mode of payment for various online retail stores. It’s also easier to convert to fiat for most exchanges thanks to its predictable market price.
What services accept stablecoin as payment?
There are many kinds of services where stablecoin can be used as payment. Sportsbet’s bookmaker and casino games are among the best examples. There are also online marketplaces, exchanges, and brokerages where it’s popular for crypto trading.
