Stable coins are the bridge between the world of cryptocurrencies and everyday fiat money, as their prices are pegged to a reserve asset such as the US dollar/Euro or gold. This significantly reduces volatility compared to something like Bitcoin and leads to a form of digital currency that is more suitable for everything from day-to-day transactions to exchange conversions.
Stable coins in a few words
Coins have an asset reserve that assures buyers that the issuer will be able to redeem the issued coins. have proven to be a more reliable option as they are available worldwide and do not require dependence on traditional banking channels. Worldwide instant payments are also a major hit for stable coins.
Stable coins allow faster, cheaper, and safer transactions without the restrictions associated with traditional banking, such as location restrictions and lack of financial services during the holidays.
Stable coins are more reliable and less volatile cryptocurrencies than known counterparts like Ethereum and Bitcoin, which means more potential for safer investments.
Why stable coins are important?
The USDC stable coin, for example, is minted by dollar-denominated assets of at least equal fair value to the USDC in circulation in segregated accounts with regulated financial institutions in the United States. These accounts are authenticated (publicly audited) by an independent accounting firm.
They are global and accessible to anyone on the Internet, at any time of the day.
They transmit fast, cheaply, and securely
They originate digitally on the Internet and are programmable.
Benefits of Stable coins
Minimizing Volatility: The value of cryptocurrencies like Ethereum and Bitcoin changes by the minute. An asset pegged to a more stable currency can provide buyers and sellers with certainty that the value of their token will not increase or decrease unpredictably in the near future.
Trade or save assets: You don’t need a bank account to hold stable coins and they are easily transferable. Stable coins can easily be sent pegged at the same value all over the world, including places where the US dollar can be hard to earn or where local currencies are volatile.
Earning Interest: There are easy ways to do this. earn interest on stable investment in coins. They are more profitable than banking institutions and are less risky than the stock market.
Transfer money at a lower cost: International transfers, fast processing, and low transaction fees make stable coins like USDC a good choice for sending money anywhere in the world.
Disadvantages of stable coins
Depend On Traditional Financial Markets: Stable coins are often pegged to fiat currencies, which makes their value dependent on the current state of the global economy and subject to inflation, which fiat currencies have.
Unregulated: The lack of regulation within the field is something that all cryptocurrencies pertain to and that needs to be taken care of if it wants to reach the vision which it was created.
Centralization: The majority of stable coins are owned by an individual organization. This means that stable coins, although decentralized, are owned by a single entity that controls issuance and supply. Although there are some exceptions to these centralized coins (like DAI).
While there are dozens of different types of stable coins, the three most popular are USDT, USDC, and BUSD.
What is USDT?
USDT was originally created to solve the following problems: Simplify the conversion of national currencies, provide offers a more stable version of bitcoin, providing users with a Tether (USDT) verification method that stands out as the third-largest cryptocurrency in the world.
While there is some controversy surrounding the stability of Tether at $1, there are still many reasons to prefer the coin over regular money, which is discussed below.
What is USDC?
USDC is another stable coin that is pegged to the US dollar. It was created to speed up transfers and reduce volatility associated with Bitcoin and other cryptocurrencies. As an Ethereum token, USDC can be stored in a blockchain-enabled wallet.
In addition to facilitating remittances, USDC also allows users to generate higher profits when lending their stable coins through various decentralized finance applications. The popularity of the USDC has increased dramatically over the past few years, with an average of around 2021 billion dollars being transferred through the Ethereum network every day by the records of March 2 at the latest.
What is BUSD?
Binance USD is a managed, cash-backed stable coin equal in value to US dollars. For every Binance USD purchased, there is a reserve dollar. When the price of the dollar fluctuates, the value of the stable currency also increases or decreases.
Holders of BUSD can exchange their stable coins for US dollars and vice versa. In addition, Binance USD exists on three blockchains: Binance Smart Chain, Ethereum, and Binance Chain. Therefore, BUSD holders can trade stable coins between these blockchains according to their needs and requirements.
Fundamental characteristics of the three most popular stable coins:
USDT was launched in 2014. It is based on the Ethereum Blockchain. Tether is its issuer and it is pegged to the US Dollar. It has come under many speculations and controversies, which we will discuss below in the article.
USDC was launched in 2018. It is based on multiple blockchains namely Ethereum, Solana, Stellar, and Algorand. It is also pegged to the US Dollar and its issuer is Circle. It is an ERC-20 token that can be used with every application supporting it.
BUSD was launched in 2019. It is based on Ethereum, Binance, and Binance Smart Chain blockchain. Binance and Paxos are its’ combined issuers. Yupp, you guessed it right, it is also pegged to the US Dollar.
Market sentiments are more in favour of USDC and BUSD due to the FUDs and controversies that keep going around USDT.
All the buzz that is going around Tether (USDT) for the last few years
At first glance, Tether seems like a perfectly reasonable innovation that seeks to fill the gaps that exist in the market. The gaps start to appear when we dig a little deeper. Tether’s appeal comes from its value being pegged to the US dollar. The company first claims to have achieved this by ensuring that its cryptocurrency is fully backed by reserve cash(fiat).
However, there is a major flaw in this system. Since Tether is the sole creator of coins, it can create as many of them as he wants while falsely claiming that these new Tethers are also fully backed by cash reserves. And that’s exactly what allegedly happened in a lawsuit against Tether according to the New York Attorney General’s office.
Documents filed by the Attorney General noted that during his investigation he discovered that not only did the company not have enough reserves to support the amount of Tether in circulation, but there were periods of time when the company does not have a bank account or has no access to banking – revealing Tethers’ claims it has been backed is significantly misleading.
The company has since altered its claim from being backed by cash reserves, to now being backed by a number of assets (which it refers to as its ‘reserves’) –including cash which is only a small subset. They argue that the cumulative value of their assets is equal to the amount of Tether in circulation, although it should be noted that the veracity of these claims has been repeatedly challenged.
What are the repercussions that the crypto space can face due to it?
Unfortunately, the problems are not limited to Tether itself but affect the entire cryptocurrency market. If the documents filed by the New York Attorney General are true, it means that a significant portion of the demand in the cryptocurrency market is likely not supported by the real purchasing power and prices of the currencies. Electronics like bitcoin have been artificially inflated.
And since Tether is not just any other cryptocurrency, but a medium of exchange in the crypto world, its demise will have a severe ripple effect that could trigger a crash. severely blamed on the entire cryptocurrency market. conclude that the opposite would probably be true; that the rapid decline of Tether will cause the price of bitcoin and other cryptocurrencies to drop significantly.
There is no doubt that stable coins should have a place in the crypto space. They provide a bridge between the real world of fiat and cryptocurrencies, as well as a place of storage for investors and traders to temporarily escape the high volatility of the cryptocurrency market.
However, there is reason to be concerned that crypto users are becoming too dependent on stable coins and that the lack of potential failure of Tether or any other leading stable coin could cause damage to the environment. more crypto space than any hack or a spicy story can ever cause.
Ultimately, if stable coins remain the focus in the crypto space, the best way to operate them is within a regulatory compliance framework that still allows for a significant degree of decentralization and censorship resistance.