What are stablecoins? Stablecoin classification in cryptocurrency
- 1. What is Stablecoin?
- 2. What problems do stablecoins solve?
- 3. The Importance of Stablecoins to Crypto
- 4. The role of Stablecoins
- 5. Features of Stablecoin
- 6. Different types of Stablecoin
- 6.1 Full-reserve Stablecoins
- 6.2 Partial-reserve Stablecoin
- 6.3 Over-collateralized Stablecoin
- 7. How Stablecoins Maintain Valuation
- 7.1 Redeem and expand
- 7.2 Algorithmic
- 7.3 Leveraged Loans
- 8. The Stablecoin Potential
- 9. 6 Best stablecoins in the crypto market
- 9.1 Tether Stablecoin – USDT
- 9.2 Binance Stablecoin – BUSD
- 9.3 Coinbase Stablecoin – USDC
- 9.4 MakerDAO – DAI
- 9.5 Gemini Stablecoin – GUSD
- 9.6 TrueUSD Stablecoin – TUSD
What is Stablecoin? Stablecoin is known as a unique Cryptocurrency. This is also a potential piece to connect the Crypto space with the traditional financial market. So why are Stablecoins important in Crypto? How many Stablecoins are there, and which is the best quality? Through the article, let's explore the details of this currency with BHO Network.
1. What is Stablecoin?
Stablecoins are cryptocurrencies designed to minimise the impact of price fluctuations. Stablecoins work by fixing to a stable asset such as a commodity, real money, or another cryptocurrency. Stablecoins inherit the characteristics of Blockchain and peer-to-peer value transfer. In addition, this Protocol also ensures stability, less affected by fluctuations in the market.
Stablecoin is a digital currency developed on the Blockchain platform and has a stable value
2. What problems do stablecoins solve?
The biggest problem in the crypto market is volatility, and Stablecoins can solve that. Stablecoins are likened to a bridge between the electronic and financial markets, making it easy to convert Fiat to Crypto.
- Investors or traders can transfer assets to Stablecoins to avoid the volatility of cryptocurrencies.
- For stores and companies, it is difficult for companies to accept payment in 1 type of Crypto with fluctuations of 20-30% of the value in a short time. Because of this, the widespread adoption of cryptocurrencies has become much more difficult.
Stablecoins were born to solve the volatility in the Crypto market
3. The Importance of Stablecoins to Crypto
Most people find it difficult to accept that Crypto is highly volatile and speculative. Moreover, the token price can also drop by tens of per cent within one week. Stablecoins can separate the high risk/high return characteristic of Crypto from the volatility of crypto assets. Because of their “stable” property, Stablecoins are suitable Cryptocurrencies for storing and as a medium of value exchange.
Stablecoins are important for Crypto
4. The role of Stablecoins
Currently, many people are interested in cryptocurrencies. Stablecoins also receive significant attention from users. So what is the platform's role? The following content will cover in detail.
- For investors: Stablecoins helps participants transfer accounts to Stablecoins to avoid the instability of the cryptocurrency market. The unique thing is that investors do not need to change to Fiat.
- For businesses: It will be difficult for the company to accept payments in Crypto with 20-30% volatility in a short time. Stablecoins were born to connect the electronic market and the traditional financial market. In addition, this cryptocurrency makes it easier to convert from Fiat to Crypto.
The Role of Stablecoins
5. Features of Stablecoin
The most crucial feature of Stablecoins is to separate the high risk/high return of Crypto from the frequent volatility of Crypto assets. In addition, Stablecoins need to ensure the following feature.
- Maintain a stable price
- Guaranteed high security, backed by rigorous testing.
Stablecoins need to ensure the characteristic of maintaining a stable price
6. Different types of Stablecoin
Stablecoins will be classified based on the criterion of “Collateral ratio” (also known as “Backed”) because collateral has an essential role in supporting stable Stablecoin prices in Peg. This stable Coin is classified into 4 main categories with different capital optimisation capabilities.
6.1 Full-reserve Stablecoins
These Stablecoins include USDC or USDT and use US dollars or a liquid asset of equivalent value as a reserve. 1 USDC minted on-chain will have 1 US dollar or equivalent high-value asset in budget. This type also requires users to trust Custodian, not on-chain intelligent contracts. This is also the most used form of Stablecoin in Defi.
USDC and USDT are the 2 most used Stablecoins in DeFi
6.2 Partial-reserve Stablecoin
The typical Stablecoin for Partial-reserve is Frax finance's FRAX. For every FRAX coin minted to the market, only a fraction of the value is stored in USDC. In addition, volatility and residual reserves are absorbed by FXS (Project Governance token). Frax's pattern works quite well when FRAX price still hovers around the $1 Peg level.
Frax's model has proven to work quite well
6.3 Over-collateralized Stablecoin
The most representative Stablecoin of its kind on the market is DAI. For every DAI minted, there will be $1.5 - 1.6 worth of collateral in the Maker Vault. The Vault is liquidated when the collateral value falls below the minimum threshold. Reduce the supply to bring the price of DAI back to the Peg price.
DAI is the most typical Stablecoin of Over-collateralized Stablecoin
Over-collateralized stablecoin makes it possible for DAI always to be Backed. Because an amount of assets is worth more than the total amount of DAI released by Minted. However, the disadvantage of Over-collateralized is that it is difficult to scale.
7. How Stablecoins Maintain Valuation
Every Stablecoin requires one or more mechanisms to correct the price when it deviates from Peg. Based on the rationality of this mechanism, you can consider whether the idea of the project is feasible or not. Here are a few of Stablecoin's most notable
7.1 Redeem and expand
With Stablecoins like USDT or USDC, when the price leaves the Peg, the system will have the following balancing mechanism:
- If USDC trades at a price below $1, USDC holders should exchange USDC for the primary collateral mortgage. Therefore, you should buy for a dollar or less than a dollar.
- If USDC is trading above $1, holders should collateralise the dollar to minted out USDC. Then you sell on the market to make a difference.
Redeem & Expand is one of the Stablecoins price stabilization mechanisms
With Algorithmic, there are 4 most outstanding price balance models today.
- Model Seignorage (3 Tokens) of Basis cash.
- Model Rebate (2 Tokens) of Ampleforth.
- Fax Finance's fractional (2 Token) model.
- Terra's model (2 Tokens)
Algorithmic includes 4 price-balanced models
Meanwhile, Terra's model is considered the most successful. This model is based on the application and scale of Stablecoin. UST is minted by burning LUNA (Terra's native token). This pattern is also the volatility of UST absorbed by LUNA. When UST price < Peg, you sell LUNA to buy back Stablecoin. Conversely, when UST price > Peg, you should Mint add USDT.
7.3 Leveraged Loans
Stablecoin using this model is MakerDAO (DAI). Users lock up collateral like Ethereum and other tokens in collateralised debt positions (CDPs). Then they will borrow DAI from the system. Users can unlock their collateral when paying back borrowed DAI, with a Stability fee that accrues over time.
The famous stablecoin that uses Leveraged Loans is MakerDAO
When the collateral value in the CDP falls below 1.5 times the value of the borrowed DAI, the debt position is automatically liquidated. Besides, collateral is also used to buy back DAI. When collateral loses value rapidly and falls below the value of the borrowed DAI, MKR tokens are minted to cover the shortfall.
8. The Stablecoin Potential
Many people are still wondering if investing here will become a trend. Let's take a look at the development history of the Stablecoin ecosystem from 2013 until now. That 2018 was a boom year for Stablecoins.
More than 36 projects continuously launched into the market, accounting for more than 54% of the total current Stablecoins. In addition, this stable Coin will continue to thrive with the support from big names like JPM Coin,...
Stablecoins are still going strong
9. 6 Best stablecoins in the crypto market
Stablecoins have up to the 6 most significant stablecoins today. The list of these coins will not be in the price order, as their prices are always regular.
9.1 Tether Stablecoin – USDT
This is a well-known Stablecoin backed by Fiat. In particular, Tether is also supported by the most popular currency, USD, at a ratio of 1:1. Tether coin ranks at 3rd place in Coins ranking on CoinGecko. You can currently buy and sell Tether on exchanges that list this Coin, like Binance, HitBTC, etc...
Tether is a well-known stablecoin backed by Fiat
- Convenient, easy to set up, and fully support participants
- High liquidity in the Stablecoin market
- The organisation has not had an official public audit leading to a lack of transparency.
- Exchanges charge relatively high withdrawal fees. These can be mentioned as Remitano is 10 USDT, Houbi is 5 USDT with each withdrawal.
9.2 Binance Stablecoin – BUSD
BUSD is a Stablecoin issued by Binance. BUSD ranks 13th with a market cap of around $13,664,799,133 as of September 29, 2021. This is a digital Fiat currency in the form of ERC20, BEP-2, and BEP-20 standards and supports 1:1 USD. You can buy and sell BUSD on exchanges like Binance, Coinsbit,...
- BUSD is public and transparent, with recognition from the New York Department of Financial Conduct.
- It helps users to save money and is convenient. BUSD is also the ideal way to access the decentralised economy without volatility.
- This is the Stablecoin that plays an essential role in transactions, payments, and decentralised finance.
BUSD is issued by Binance
9.3 Coinbase Stablecoin – USDC
When it comes to Stablecoins, everyone will probably mention USDC. This is a Stablecoin issued by Circle and sponsored by Goldman Sachs. Currently, USDC is fully backed by USD at an exchange rate of 1:1. USDC ranks 8th in CoinGecko's rankings, with a market capitalisation of approximately $31,307,526,264. You can buy and sell this Coin on several exchanges such as: Kraken, Binance, and LBank,...
USDC is a Stablecoin issued by Circle
- It is issued by a famous company, audited by Grant Thornton LLP – the world's top 10 auditing firms.
- USDC is transparent with open source code. This allows users to quickly check any issuance and the amount of USDC in circulation.
- Users can convert USD to USDC, provided through the issuer's KYC/AML process.
- Transactions are fast and cheaper than traditional fiat money transactions.
- Circle only supports converting Fiat to USDC and vice versa directly for US citizens. Other players can only convert on exchanges.
- Fewer Trading Pairs Available Than USDT.
9.4 MakerDAO – DAI
This is a stable decentralised cryptocurrency established via the Makers DAI Stablecoin system. DAI is backed by crypto-backed assets, which can be viewed publicly on the Ethereum Blockchain. DAI also uses margin trading to respond to market fluctuations and preserve the currency's value.
DAI is established via the Makers DAI Stablecoin (MKR) system.
- Borrowed based on Ethereum, anyone can create DAI with ETH and technology using dApp.
- No government or other centralised authority can cancel DAI.
- DAI bypassing intermediaries should always allow direct exchange.
- There is stability and reliability in the volatile crypto ecosystem.
9.5 Gemini Stablecoin – GUSD
This is a price-stable cryptocurrency developed by a reputable Crypto exchange in the US- Gemini onion. The US dollar backs GUSD at a ratio of 1:1. GUSD is also produced on Ethereum's Blockchain platform with the ERC20 standard. GUSD ranks 220th on CoinGecko as of September 29, 2021. You can buy and sell this Coin on Hotbit, BitMart,...
Gemini Stablecoin is a price stable cryptocurrency issued by a reputable Crypto exchange in the US- Gemini
- Borrowed based on Ethereum, anyone can generate DAI with ETH and technology using dApp.
- No government or other centralised authority has irrevocable DAI.
- DAI bypasses intermediaries, so it always allows direct exchange.
- Stable, reliable in volatile.
9.6 TrueUSD Stablecoin – TUSD
The last stable Coin you need to know is TUSD. A cryptocurrency backed by USD on the TrustToken platform. In addition, TUSD is managed by people who have worked with large organisations such as Google, UC Berkley, and PwC. To buy and sell TUSD, users can refer to some such as: Binance, Bitrue,...
TUSD is a cryptocurrency backed by USD on the TrustToken platform
- Operation and storage on intelligent contracts (Smart Contract) should be able to secure assets for investors.
- Stable, regulated by law. Therefore, TUSD guarantees the recognition of ownership with financial and legal institutions.
- The exchange rate is equal to the USD.
- Users can withdraw money directly at the bank. Besides, users do not need to interact with the system when they want to change money.
Above is helpful information to help you understand "what is Stablecoin," compiled and updated by BHO Network for readers. Hopefully, you will understand more about cryptocurrencies and find the most suitable investment plan for yourself with this article. If you need detailed advice and want to read more helpful articles, please visit the website immediately!
Published on February 12, 2022
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