Stablecoins: the quiet achievers
Crypto stablecoins are largely ignored by the media who are more inclined to focus on Bitcoin, Ethereum and other cryptocurrencies.
Despite the long term gains made by Bitcoin, Ethereum and other cryptocurrencies, many find them a challenging asset class to invest in because of their short term volatility. For example, it is not uncommon for the price of bitcoin to halve during any 12 month period. A potentially heart-stopping variation for short term investors who buy in at the top.
If a person has gone to all the trouble of converting a small amount of their (normal) fiat or cash dollars into cryptocurrency ready to trade, only to find the market is in free-fall, then what is one to do? Is there any place to go? Or does one need to cash out of cryptocurrency back into fiat dollars? The simple answer chosen by most crypto investors are cryptocurrency stablecoins such as USDT, USDC or BUSD that are pegged on a 1 for 1 basis with the US dollar.
Convenience, that allows the investor to retain their assets within the crypto ecosystem ready for the next opportunity. But how safe are crypto stablecoins?
If the fast growing supply of stablecoins is anything to go by, then it would seem that the market overall, has increasing faith in the ability of stablecoins to provide both stability and liquidity.
However, on closer inspection, we find that these crypto stablecoins are run by a diverse bunch of organisations with different ideas about the underlying collateralization behind the digital dollars they issue.
One of the most popular stables is USDT, or Tether, that is used in the majority of trading pairs on centralized crypto exchanges. Whilst Tether has dominated in previous years, representing nearly 100% of stablecoin supply back in 2017, it has also had its share of detractors.
According to the data below, the influence of Tether is gradually waning and giving way to a newer crop of stables including USDC, BUSD, DAI and UST.
The USDC stablecoin is managed by a US organisation called Circle, who claim that each USDC stablecoin issued is backed by US dollars. Moreoever, according to USDC’s website, they have 53.5B of their stablecoins in circulation.
Another growing stablecoin is Binance USD or BUSD, which also claims to be a 1 for 1 backed stablecoin that is part of the Binance ecosystem. BUSD, is the default stablecoin used in decentralised transactions on Binance Smart Chain and is also widely distributed in trading pairs throughout the popular Binance cryptocurrency exchange.
Dai, a niche stablecoin created by Maker Dao, is minted when a person deposits cryptocurrency into a vault located in the Maker Dao platform.
The Maker Dao protocol then manages the collateralization process in a decentralized and permissionless manner. Dai is mainly used by traders who participate in activities like yield farming, a super high risk part of the decentralized finance ecosystem.
One of the newer stablecoins is Terra USD or UST which is an algorithmic stablecoin and part of the Terra / Luna ecosystem. Why is UST growing so quickly? It presently offers one of the highest annual rates of return of any stablecoin on the market. Before exploring any such opportunities, people should carefully weigh the high risks involved.
Although crypto stablecoins are here to stay, it will be fascinating to see how they make room for the growth of Central Bank issued digital currencies (CBDC’s) that are being considered by a number of countries across the world.