Stablecoins – All you need to know

In this article we’ll analyse the best ways to get paid in cryptocurrency and why this will be so important in the future. 

Stablecoins are cryptocurrencies that are pegged 1:1 to an asset with a stable value. Usually, we’re talking about fiat currencies like USD, EURO, commodities like gold and others. Stablecoins are extremely convenient tools that help you escape the volatility of the crypto space and that help you navigate the decentralized finance ecosystems. Of course, there are risks associated with stablecoins. Let’s take a moment to learn all we need to know about stable coins. 

Why are Stablecoins here? 

Let’s be honest with ourselves. Cryptocurrency is the most volatile asset class in existence! It’s a never-ending storm with massive waves of volatility that swallows new investors by the thousands. Only the bravest men and women dare to venture into this treacherous terrain and even they are not immune from fear and greed that descends upon the whole space in a matter of minutes. Enter stablecoins! 

These cryptocurrencies (usually built on top of other networks such as Ethereum, BSC and others) are pegged to the value of a stable asset like the USD, EURO or even gold. They allow investors and speculators alike to find a well-deserved refuge from the insane volatility. People love to use stablecoins in trading, investing, and getting paid in cryptocurrency for their work in this space. Another favourite place that welcomes stablecoins if of course Decentralised Finance. 

Stablecoins also allow investors to be completely immersed in the crypto space without having to worry about the value of the total holdings melting away during the bear market or periods of serious dumps. You know these periods right? It’s when the whole internet is freaking out and memes of “McDonald’s job applications” circulate around, warning leveraged traders just how dangerous the crypto market can get. 

Perhaps the most important reason why people love stablecoins is because these cryptocurrencies completely pull out the fangs and talons of the regulators. Money can no longer be weaponized. Economic sanctions don’t work when you use stablecoins. Anyone with a North Korean, Iranian or Chinese nationality can now have the stability of the US dollar kept in their mobile device (or stored in a form of 24 words mnemonic phrase in their head) without a hint of worry that some mythical “economic sanctions” or “restrictions” will be imposed by their own government. This is why many countries with heavily inflated currencies are flocking to cryptocurrency and stablecoins. Money just became borderless, permissionless, and decentralised! Let’s take a look at a few examples.

The good, the bad, and the ugly. 

Countless companies and crypto projects are launching their own stablecoins these days. There are so many out there, it’s hard to keep track of them all. Let’s take a look at a few examples. Cryptocurrency is inherently risky, so we’ll focus on the riskiest stable coins first.   

AMPL – Ampleforth

The highest risk stablecoin in existence is perhaps the decentralised algorithmic stablecoins like Ampleforth. The “stable” value of this coin is provided by a sophisticated algorithm (called rebase), that manages the total supply of coins depending on the current price. It’s fascinating to read about it and understand how it ticks. This is undoubtedly the next step in the evolution of stablecoins as we move towards the future. 

At this current stage, the 1:1 peg to the US dollar is not working properly, therefore these stablecoins have a long way to go before people find a better solution. People who don’t understand the exact mechanism of AMPL should definitely not work with it! 

USDT – Tether

This is by far the most common stablecoin in existence. The brainchild of the infamous Bitfinex exchange, it has (for now) withstood the test of time. Originally built on top of the Ethereum network, this stablecoin has extended its tentacles to more networks such as TRON and POLYGON (mainly to avoid high network gas fees).  Tether is not 100% backed by the US dollar and just like the gold in Fort Knox, it has never been audited. Another spicy detail is that USDT is actively being investigated by the US authorities. 

However, people in many countries don’t care too much about these “trivial” details and keep using USDT to their heart’s content. To the regular crypto OG, USDT is a hot potato. People like to use it as a quick tool since they are very well aware of the risk. It’s not recommended to store USDT for an extended period of time. If you work with USDT, treat it like a grenade without a pin. Yes, there’s a time delay, but when it eventually blows up, it will shake the whole crypto market for months. You have been warned! 

BUSD – Binance USD stablecoin 

This stablecoin is the product of Binance. Pretty much the biggest centralised crypto exchange in the world. Again, it’s not audited and known if Binance can actually back up the value of the total supply of BUSD. This definitely poses a long term risk.  

To add fuel to this fire, the SEC (Securities and Exchange Commission) is actively investigating Binance US (the US Based branch of Binance that welcomes American traders). This can be a big concern for the end of 2021 when the results of the investigation are due to be made public. Binance is also the biggest user of the USDT stablecoin. Hence BUSD and USDT are considered risky.  

Again caution is advised. You can, for sure, use BUSD for all of your wheeling and dealing. Just make sure you don’t hang on to it for too long. 

USDC

This popular centralised stable coin is audited and more trusted in the crypto space than the 2 above mentioned contenders. This is one of the darlings of DEFI (decentralised finance). Somehow, this stable coin has migrated to the most popular chains where many amazing decentralised apps are built. These decentralised applications want to attract liquidity and, of course, gladly accept USDC. 

Not everything is without risk, however! There have been instances, where USDC accounts were blacklisted by the US government. Fortunately, we are talking about accounts occupied by seriously fat numbers. If you don’t plan to work with millions of dollars, this risk (while still being real) is relatively small. 

XUSD

This incredibly cool stablecoin is a result of the hard work of the guys and gals at the Haven protocol. Focussed on privacy and fungibility, this coin is minted only after the user purchases (and burns!) a certain amount of XHV coin. The result is a private and fully fungible XUSD stablecoin, ready to be deployed in all of your crypto needs. 

It’s worth mentioning that due to the novelty of this stablecoin, the risk is definitely present. The idea is brilliant, but it needs to withstand the test of time in order to catch on and become popular. Once it does, there will be many copycats trying to steal this idea. Expect a battle of privacy-based stablecoins to be long and brutal. For now, using XUSD is not really grandma-friendly and is usually reserved for the crypto OG’s who love to poke around in new tech. 

DAI

This brainchild of the Maker DAO protocol is currently the most reliable decentralised stablecoin in existence today. Again, not only does it work on the Ethereum network, but also on Polygon, Harmony and even Fantom. The idea behind DAI is very simple. 

Users lock up Ethereum inside the Maker DAO protocol (By the way, DAO stands for; Decentralised Autonomous Organisation). The protocol mints the DAI stable coin and gives it to the user. This way, the user is free to play around on the decentralised finance, earn some handsome profits, AND keep his initial Ethereum. It’s a classic case of having your cake and eating it too.  

Another cool feature of DAI is that it’s “over collateralized”, meaning that you always have to lock up MORE Ether than the DAI coins that are minted. For example, 170 USD worth of ETH is locked up, while only 100 DAI is minted for the user. 

This over collateralisation is baked into the protocol in order to handle huge downward volatility in the crypto markets. If for some reason, the downward volatility gets so out of hand, that it threatens the solvability of DAI, Maker DAO protocol will initiate its fail-safe mechanism and actually sell a part of the MKR governance tokens to ensure that DAI is working like a Swiss watch. Pretty cool indeed. There are other risks of course, yet the DAI stable coin is currently doing a pretty damn fine job, even to the point of being worthy of hodling for a few months to a year as a stable asset. 

Future of stablecoins 

Let’s be honest with ourselves. The US dollar is being inflated like crazy as we speak. Eventually, all fiat currencies will go to zero. Fortunately for the USD, it will be one of the last ones to perish. This means, we still have a few years before it happens. 

For now, stablecoins are an amazing tool for being in the crypto space without having to lose sleep over the volatility. Traders, Investors, and people who work in the crypto space rely on them on a daily basis.  

As we head into the new financial crisis, a crash of the world markets and the next great depression, the crypto space will still be here. It will get back up, shake off the dust, and innovate its way out of any setback or turmoil. We will be seeing many more interesting stablecoins popping up. These will be backed by gold, silver, commodities, time, and many other stable assets. Human creativity is truly infinite and this is why the crypto space is such a vibrant place full of life, great innovation, and people with a free-thinking spirit. If you have the skills and can work in this industry, you definitely need to join the party.

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