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Home » What is a Stablecoin? Definition and explanation: what you need to know
Cryptocurrency

What is a Stablecoin? Definition and explanation: what you need to know

Kostiantyn TsentsuraBy Kostiantyn Tsentsura24.03.2022
What is a stablecoin
What is a stablecoin - photo_gonzo/Depositphotos

The biggest day-to-day transaction volume on the crypto market is reached by Tether stablecoin. And there are at least three more powerful digital dollars on the market. Should we trust them?

So-called stablecoins has become influential financial instruments all around the world in the last few years.

The everyday transaction volume of Tether (USDT) is far higher than the transaction volume of popular coins Bitcoin, Ethereum, XPR, Terra, Cardano, Solana altogether.

People are generally using stablecoins to buy “real” crypto.

But eventually Tether and other crypto dollars are becoming important assets to save your money when the traditional economy is collapsing.

Like in Ukraine right now, where people can only buy dollars on black market with an unreasonable exchange rate.

Stablecoins can partially solve this problem. But not for everybody, of course, as many popular crypto exchanges are now blocking Russians as a result of Western sanctions against Putin’s war.

But should we trust digital dollars?

The stablecoin definition

Stablecoins are cryptocurrencies with the price pegged to a cryptocurrency, fiat money, or exchange-traded commodities, such as precious metals or industrial metals.

In other words, the value of stablecoins should be constant and correspond to some other stable asset.

The most popular stablecoins use dollar peg, so that’s why we sometimes call them digital dollars.

By buying digital dollars you are getting cryptocurrency technically. But its price will be around $1 permanently. So that can keep you from crypto volatility.

The most popular stablecoin – Tether (USDT)

Tether stablecoin is the third cryptocurrency after Bitcoin and Ethereum by market capitalization.

Last 24 hours Tether’s transaction volume is $63.7 billion. In comparison, Bitcoin has a volume of $25.6 billion.

Tether is the fiat-backed currency that is held by a third-party financial entity – Tether Limited. Earlier journalists found out the ties between this company and the Bitfinex exchange platform. By the way, Bitfinex was the first to integrate Tether into its service.

The token appeared in 2015, declaring to back its value by 20% of the US dollar reserves held on Tether Limited accounts.

There were concerns about the Tether scam when the company issued an additional 2.3 billion tokens. The US regulator doubted these tokens were backed by fiat dollars.

But in 2019 the company confirmed that 74% of its tokens are backed by USD reserves.

What other stablecoins are out there?

Besides Tether there are some smaller-scale digital dollars. USD Coin (USDC) has a $52.5 billion market cap and $3.6 billion day-to-day transaction volume.

The coin appeared on the market in September 2018 and quickly became recognized on the most popular crypto exchanges.

Often USDC is confused with central bank digital currency (CBDC) or US digital dollar. But the coin is operated by a private entity.

The tokenization here has the three-step process. At first you send US dollars to the coin issuer’s bank account. Then the issuer makes a USD Coin smart contract to create the equivalent amount of USD Coin. After that they send you USD Coins having the substituted US dollars in a reserve.

A bit less popular stablecoin is Binance USD (BUSD), owned by the world’s biggest crypto exchange.

Because of the Binance users, it has pretty huge $5.4 billion day-to-day transaction volume. But the BUSD market cap is $17.7 billion, so the coin is only #12 at the top crypto listing.

The far more less popular digital dollars are TerraUSD, DAI, TrueUSD, Pax Dollar, Neutrino USD, Fai USD, Gemini dollar.

So should we trust stablecoins?

Let’s round up.

Tether (USDT) is controlled by Bitfinex.

USDC is an asset of an American consortium consisting of payments provider Circle, bitcoin miner Bitmain and crypto exchange Coinbase.

Binance USD belongs to Binance.

Do you see the problem here? Well, I do.

Three most popular stablecoins are actually undermining the concept of crypto as a decentralized asset.

There is a contradiction between the decentralized ideal of cryptocurrencies and the actual centralization of an important part of the market, says Senior Lecturer of Sheffield Hallam University Jean-Philippe Serbera.

And still there are serious questions about whether these organizations hold enough financial reserves to maintain the 1:1 fiat ratios of their stablecoins.

Such a need may arise in case some serious crises emerges. Oh, wait, such a crises is already happening here in Ukraine.

The economy is in ruins amidst the Russian invasion. People don’t have access to fiat currencies, at least with normal exchange rates. And digital dollars do prove their reliability. They appeared to be even more secure than fiat money or the crypto itself.

Sources: Coinmarketcap, The Conversation, Forbes

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Kostiantyn Tsentsura
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Staff writer at cryptolife.report. Kostiantyn is a Ukrainian journalist who has been covering the science-tech industry for five years. Started his career by writing articles about crypto-mining in Ukraine. Has his own experience in trading some coins. Convinced blockchain adept who thinks that crypto community will save the future of the world economy.


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