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All you need to know about Stablecoins

This article analyzes the best ways to pay in Cryptocurrency and why this will be so important in the future.

Stablecoins are cryptocurrencies 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 highly convenient tools that help you escape the volatility of the Crypto space and enable you to navigate the decentralized finance ecosystems. Of course, Stablecoins have some risks. Let’s take a moment to learn at Tycoon Insights 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 swallow 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 payment in Crypto for their work in this space. Another favorite place that welcomes Stablecoins if of course, Decentralised Finance.

What can you do with Stablecoins?

Stablecoins also allow investors to completely move 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. It’s when the whole internet is freaking out and memes of “McDonald’s job applications” circulate, warning leveraged traders just how dangerous the crypto market can get.

Perhaps the most crucial reason people love Stablecoins is that these cryptocurrencies pull entirely 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 they can store in the form of 24 words mnemonic phrases in their head without a hint of worry that their government will impose some mythical “economic sanctions” or “restrictions.” It’s the reason that many countries with heavy currencies are flocking to Cryptocurrency and Stablecoins. Money just became borderless, permissionless, and decentralized! Let’s take a look at a few examples of this Blockchain market.

The good, the bad, and the ugly

Countless companies and crypto projects are launching their 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 first focus on the riskiest stable coins.

AMPL – Ampleforth

The highest risk Stablecoin in existence is perhaps the decentralized algorithmic Stablecoins like Ampleforth. This coin’s “stable” value 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 correctly. 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 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). The US dollar doesn’t 100% support Tether, just like the gold in Fort Knox. Another spicy detail is that the US authorities are actively investigating USDT.

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 standard 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. 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 Stablecoins

These Stablecoins are the product of Binance. Pretty much the biggest centralized crypto exchange in the world. Again, it’s not audited and known if Binance can back up the value of the total supply of BUSD. This 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). When the investigation results will be public, It can be a big concern for the end of 2021. Binance is also the biggest user of the USDT Stablecoins. 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 centralized, stable coin is audited and more trusted than the two contenders mentioned above in the crypto space. This is one of the darlings of DEFI (decentralized finance). Somehow, this stable coin has migrated to the most popular chains, where many amazing decentralized apps are built. These decentralized applications want to attract liquidity and, of course, gladly accept USDC.

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

XUSD

This incredibly cool Stablecoin results from 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 the risk is present due to the novelty of this Stablecoin. The idea is brilliant, but it needs to withstand the test of time to catch on and become famous. Once it does, there will be many copycats trying to steal this idea. Expect a battle of privacy-based Stablecoins to belong and brutal. For now, using XUSD is not 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 decentralized Stablecoin in existence today. Again, it works on the Ethereum network and on Polygon, Harmony, and even Fantom. The idea behind DAI is straightforward.

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 decentralized 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-collateralization is baked into the protocol to handle huge downward volatility in the crypto markets. Suppose, for some reason. The low volatility gets so out of hand that it threatens the solvability of DAI. In that case, the Maker DAO protocol will initiate its fail-safe mechanism and 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 holding for a few months to a year as a stable asset.

What is the 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 to perish. This means we still have a few years before it happens.

For now, Stablecoins are a fantastic 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 daily.

As we head into the new financial crisis, a crash of the world markets, and the subsequent 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 exciting Stablecoins popping up. These will be backed by gold, silver, commodities, time, and other stable assets. Human creativity is genuinely 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 must join the party.

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Risk Note:

Trading Cryptocurrencies is subject to high risks and may result in capital loss. Please make sure you fully understand the risks associated with trading Cryptocurrencies and only invest as much as you can afford to lose. Be clear about your investment objectives and experience, and seek advice from an independent financial advisor if necessary. It is your responsibility to determine whether you have permission to use Tycoon platform s’ services under the laws of your country of residence. Investments in Cryptocurrencies have no protection by any Financial Services Compensation Scheme.