Top 6 Stablecoins In The Crypto Market – What Are They, How Do They Work & Why Governments Care

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  • Stablecoins play an important role as an intermediate store of value.
  • According to some experts, the rise of stablecoins has helped make other cryptocurrencies more valuable by providing traders with a “stable” place to put their money amid the inherent volatility of crypto markets.
  • They have become so deeply entangled in the system that the government feels compelled to regulate the entities that issue stablecoins.

The invention of money made it easier for farmers to trade a bushel of wheat for other basic necessities. Computers have made it easier to assign a value to goods and to trade without the inefficiencies of the barter system.

Now, with cryptocurrency, there is a similar conundrum to be solved. Bitcoin, for example, was worth $ 30,000 in July, but its value has more than doubled since. And, that’s after it already surpassed $ 65,000 in March before it plunged into the water.

Bitcoin’s volatility can be a boon to investors looking to turn a profit, but those caught on the wrong side of its price movement need a quick and easy exit to something more stable – get in, stablecoins. .

What are stablecoins?

Stablecoins are the answer to calls from early crypto investors looking for a crypto equivalent to fiat currencies like the dollar or the rupee. It had to be something that could reliably hold value over time without volatility and allow them to easily transfer that value. For example, a solution that allows Bitcoin investors to quickly convert their Bitcoin profits to a dollar-like value and then invest it elsewhere or simply withdraw that amount from your bank account. And this is how the “stablecoin” was born, to answer exactly these problems.

Why do crypto investors and traders use stablecoins?

The emergence of stablecoins was great for trading, especially since crypto trades 24/7, unlike the stock markets. Suddenly, investors could instantly “cash in” and sleep peacefully, regardless of how their crypto portfolios evolved overnight. It has become easier to get in, out and between crypto exchanges with stablecoins, without waiting for tedious banking procedures. Stablecoins also made it easy for investors to hold part of their crypto wallet like cash – in such a way that they could easily buy any coin at any time without depending on their banks’ servers, which are known to be unavailable from time to time. on time due to “maintenance”.

Some cynics have even attributed the expansion of crypto trading since 2014 and the rise in coin values ​​to the ease of stablecoins attracting greater participation in the crypto markets.

Since crypto is a free market, it has encouraged the emergence of competing stablecoins that work in different ways but satisfy the same basic need – to be stable in value. This means that $ 100 in that cryptocurrency will still be worth the same amount later today, the next day, or the next month. In fact, a stablecoin that pulls or loses value would be considered a failure in terms of stated goals.

Due to the current financial system, the most widely used stablecoins are those that “peg” their value to the US dollar. However, many stablecoins are linked to other fiat currencies, such as the Euro, GBP, IMF SDR, commodities like gold, or, oddly enough, even other cryptocurrencies – an example. known being Bitcoin Wrapped.

The six best stablecoins in the crypto market:

Cash Market value 24-hour trade volume Trade / value ratio
Tie / USDT $ 73.32 billion $ 91.85 billion 125.3%
USD / USDC coin $ 34.35 billion $ 5.41 billion 15.7%
Binance USD / BUSD $ 13.54 billion $ 7.01 billion 51.8%
Dai / DAI $ 6.47 billion $ 671.5 million 10.4%
TerraUSD / UST $ 2.88 billion $ 112.5 million 3.9%
True USD / TUSD $ 1.25 billion $ 134.9 million 10.8%

Source: CoinMarketCap, values ​​as of November 9
Note: All six are pegged 1: 1 to the US dollar and reside as tokens on blockchains that support smart contracts, such as Ethereum, Binance Smart Chain, etc.

Tie (USDT)

Tether was originally launched in 2014 under the name RealCoin. With a Tether still worth a US dollar, its supply is only limited by the dollar reserves claimed.

Being the largest stablecoin, Tether has felt pressure to compile regular reports on its reserves, to prove that it can maintain its peg to the dollar. The most recent report shows that around ten percent is held in cash or as a deposit. Almost half of Tether’s reserves were made up of “commercial paper” – short-term debt issued by companies to raise funds – which seems risky, but the rating is considered relatively safe and classified as an “equivalent of. Treasury “.

Breakdown of Tether reserves:

Active Value
Commercial paper, certificates of deposit 30.80,76,54,349
Cash and bank deposits 6,28,27,56,692
Reverse Repo Notes 1.00,06,62,458
Goods of treasure 15,27,95,28,705
Guaranteed loans (unaffiliated entities) 2,51,71,40,390
Corporate bonds, funds and precious metals 4,83,08,21,277
Other investments (including digital tokens) 2,05,46,26,204

Source: Tether report for period ending June 2021, with total reported assets of $ 62.77 billion

However, the basic promise that every Tether is backed by dollar reserves in one form or another seems to have satisfied enough people to make it indispensable to the crypto business. In fact, it’s so widely used that Tether changes more hands in a single day than its entire market cap, making it a trade-focused currency.

USD coin (USDC)

USDC’s offering is limited by its dollar reserves and was launched in 2018. Adding to the trust, its founding member, the crypto exchange Coinbase claims to have achieved regulatory compliance. USD Coin is accepted by most major exchanges, in addition to increasing its use in decentralized finance (DeFi), DApps, and games.

Binance USD (BUSD)

BUSD was launched in 2019, with a supply limited by dollar reserves that are audited monthly. One of the largest crypto exchanges, Binance, is a founding member. This means that users who convert fiat / crypto to BUSD can use the exchange services at no cost, in addition to DeFi services which can generate additional income.

Dai (DAI)

The offer of the Dai token is limited by the guarantee stored in its vaults. However, this collateral is not in US dollars but in other cryptocurrencies, which led to a balancing act in early 2019. It can be used for trading, but is more prevalent on currency services. DeFi protocol.

DAI was first launched in 2017 and has added financial services since then. The stand-alone MakerDAO governs the DAI, with the issuance of Dai tokens being decentralized – any user is allowed to create DAI tokens by depositing their Ether tokens as collateral.

TerraUSD (UST)

The TerraUSD stablecoin was launched in 2020, with an interesting way to maintain its peg of one UST to the dollar. Its offering will algorithmically change based on the price and supply of Terra’s native LUNA token, to create a balance that will retain its value.

While it can be used for payments and trading, it is best known for DApps with DeFi services and Anchor Protocol which allows deposits to earn rewards / returns passively.

True USD (TUSD)

TrueUSD had a limited launch in 2018, with claims of regular audits and being the first stablecoin fully backed by the US dollar. Their checks indicate that the supply is limited by the dollars they hold. As the table above shows, the daily churn / trade rate is relatively low and the TUSD allows DeFi and staking to generate returns on holdings.

Additionally, TrueUSD partners with a bank for digital payments and incubates “digital assets to DeFi” projects.

Risks That Cloud Stablecoins

On a broader level, stablecoins have helped integrate cryptocurrency into the mainstream financial system. Thus, cryptocurrency no longer operates on a parallel track, making it easier for economic shocks on either side to reach the other.

In addition, entities that issue stablecoins accumulate power similar to that of banks, but without any licensing or auditing requirements. This has led to calls for stablecoins to be regulated like banks, as their business integrates them deeply into the financial system.

Their banking-like activities mean that the missteps would have consequences not only for the crypto economy worth nearly $ 3 trillion, but would also affect the wider global economy through companies that accumulate significant amounts of cryptocurrency. Billionaire investor Mark Cuban and MakerDAO founder Rune Christensen both mentioned that stablecoins could be one of the first cryptocurrencies to see formal regulations.

For an American investor, the easy conversion to and from stablecoins loses its luster – larger stable entities are required to report numbers to tax authorities, which must be corroborated in a person’s tax return upon completion. of the year. This means documents and records that must be kept, for those who earn taxable income from cryptocurrency trading.

For governments, however, stablecoins are an experience with a lot to learn. The results encouraged interest in the central bank’s digital currency (CBDC), with 87 countries exploring this movement for the “future of money”. If a digitally convenient CBDC becomes available, we may well see investors abandoning stablecoins in favor of CBDCs instead.

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