Stablecoins are cryptocurrencies designed to maintain a single value over time. Stablecoins are usually pegged to fiat currencies, and there are more stablecoins pegged to the US dollar than any other currency. Easy examples of stablecoins are USDT, USDC, DAI, and BUSD.

Typically, cryptocurrencies are volatile. They may appreciate or depreciate, depending on a lot of factors. Crypto investors usually project an increase in the value of their crypto assets over time. But for stablecoins, the narrative is different. Holders of stablecoins want the value to be stagnant.

Why Stablecoins?

Stablecoins are the "eighth wonder" of the crypto world. Before their invention, crypto traders used Bitcoin and Ether as base pairs while trading. Thus, measurements of profits and losses in trading were against BTC and ETH. Also, it was almost impossible for a trader's crypto holdings to maintain the same value for an extended period because of volatility. Eventually, the game changed in 2014 when Tether (USDT), the first stablecoin, was invented.

There are many questions as to the reason for the invention of stablecoins. Since they are not designed to appreciate as their market cap expands, why would crypto investors want to buy stablecoins? Here's why stablecoins are more valuable than their fiat equivalent.

• Staking and Earning: Stablecoins allow for staking on blockchain platforms. Staking and yield farming give investors more value for their tokens. Typically, the design of staking platforms is to reward long-term holders of a token. Most staking platforms offer up to 8% annual returns for staking BUSD, DAI, USDT, USDC, and other stablecoins. You can't earn that much from saving your fiat in the bank as an investor.
• Easy Transfer of Asset: It is easy to send money to someone within the same country. However, transferring funds across borders can sometimes be difficult, especially if the recipient uses a different currency. Stablecoins make sending and receiving money on the blockchain easy. Moreover, crypto transactions are near-instant, and the receiver gets the exact value sent because stablecoins are not volatile.
• Stablecoins are Less Centralized: Although the most popular stablecoins are centralized, utilizing stablecoins for transactions is usually a better option, especially for bulk transactions. Stablecoins offer higher limits for sending and receiving funds with fewer restrictions. 

Notably, there are also decentralized stablecoins used by DeFi maximalists. DAI is the first and largest decentralized stablecoin. It is widely used by crypto fans who want to avoid every bit of centralization.

• Blockchain Utility: Stablecoins can be used seamlessly for blockchain transactions. Metaverses and NFT marketplaces are more receptive to stablecoins than fiat. On the enter.art NFT marketplace, there's a lot of original art you can purchase with the Binance stablecoin. 
  
  

This beautiful piece of art created by @Luvcraft can be purchased with BUSD. The artwork features the story of Kyle, destined to be a farmer. But when the world descended into the chaos of the second corporate war, Kyle faced a life-changing decision. Would Kyle chase his destiny, or would he convert his pruning shears into a sword? You can use BUSD to claim the Kyle Leritzky NFT here.

The Most Popular Stablecoins

There are many stablecoins, but three of them lead the crypto ranks. Tether, USD Coin, and Binance USD are the only stablecoins in the top ten ranks of cryptocurrencies.

Tether

Tether is the most popular stablecoin with a current market capitalization of $67 billion. The stablecoin is the property of a Hong Kong based company, and its ticker symbol is USDT. Tether has external reserves that help the token maintain its dollar value. Just like other cryptocurrencies, USDT has a circulating supply.

The role of Tether as a company is to ensure that the amount of USDT tokens on the blockchain never exceeds that in its reserves. If the circulating supply on the blockchain exceeds that in its reserves, this could cause the value of USDT to fall below its $1 peg. Interestingly, USDT trading is possible on any reputable crypto exchange.

Binance USD

The Binance USD is also pegged to the dollar and is owned by the Binance exchange. It is the third-largest stablecoin. When it launched in 2019, only the Binance exchange supported the stablecoin. However, BUSD has grown rapidly and is now available on multiple centralized and decentralized trading platforms.

Interestingly, traders using BUSD as their base pair while trading on the Binance exchange can swap their tokens for free without incurring fees. Thus, BUSD may be an excellent stablecoin option if you often trade on the Binance exchange.

BUSD can be used to participate in NFT auctions on the enter.art marketplace. Some of the best global artists auction their art collectibles on enter.art. You can check out ongoing auctions on the enter NFT marketplace here.

BUSD also serves as a bridge between centralized and decentralized finance. With the Binance USD, users can gain exposure to multiple DeFi benefits like yield farming and staking while incurring lower risks. 

Binance USD is collateralized by actual cash and cash equivalents managed by Paxos, a blockchain-focused FinTech company in the United States. The stablecoin is audited monthly by Withum to ensure that its circulating supply synchronizes with its cash and cash equivalent reserves.

Pax Dollar (USDP)

Paxos is a dollar-backed stablecoin that was launched in 2018. One of the goals of launching the Pax dollar, formerly Paxos Standard, is to make the digital economy accessible to anyone.

Surprisingly, a report from the Global Findex Database revealed that more than 1.7 billion adults do not have access to bank accounts. The USDP was created to break the barriers to accessing finance. Since the Pax stablecoin exists on the blockchain, it is more accessible to individuals and secure to use.

The Pax dollar is backed by US dollars and highly liquid cash equivalents. Its non-cash collaterals are held in the form of US Treasury bills with a maturity period of three months or less. The close maturity timeline for its collaterals protects USDP from losing value due to significant changes in interest rates. When its non-cash collaterals have a maturity period greater than three months, Paxos obtains overnight repurchase agreements for such collaterals.

Like BUSD, the Paxos dollar is audited by Withum, a top-ranking auditing firm in the United States. Paxos’ monthly attestation reports are available on its official website. The attestation reports since 2018 have revealed that Paxos’ collateral backings are consistent with the circulating supply of USDP tokens.

USD Coin

USDC has been rapidly closing its market cap gap with USDT in 2022. USDC is trusted by millions of individuals globally because of its reputation as a regulated asset. Also, the coin has maintained its 1:1 peg with the dollar amidst extremely unstable market conditions.

Circle, in collaboration with Coinbase, founded USD Coin. Recently, Circle launched another stablecoin pegged to the Euros (EUROC). Crypto users in European nations have found the Euro Coin useful for crypto transactions. Several traders have converted their dollar-pegged stablecoins to EUROC. Less than two months after the launch of the stablecoin, EUROC has reached a market cap of $75 million.

Algorithmic Stablecoins vs. Collateralized Stablecoins

The different stablecoins existing today have varying mechanisms for maintaining their stability. For algorithmic stables, their peg is maintained using smart contract algorithms. The smart contract balances the token’s demand with supply. In many cases, the algorithmic stablecoin is linked with another crypto asset.

When a dollar-pegged coin trades above its $1 threshold, the smart contract automatically mints more stablecoins. The minting process increases the stablecoin’s supply, pushing its value down until it regains its 1:1 peg. On the other hand, if the stablecoin trades below its peg, more coins are burnt to reduce its supply. This helps to boost the stablecoin’s value.

This mechanism works for stablecoins but exposes users to a higher risk. Extreme market conditions may cause the price of the stablecoin to drift significantly from its peg. Thus, excessive minting occurs, leading to an infinitive supply, like in the case of UST and LUNA.

Collateralized stablecoins are backed by cash and other non-crypto assets. These could be gold, treasury bonds, fiduciary deposits, and more. For collateralized stablecoins, their reserves need an equal or higher net worth than the token's circulating supply.

When crypto holders sell their stablecoin, the equivalent value is burnt. At the same time, when a stablecoin is purchased, the value purchased is minted on the blockchain. This helps maintain a balance between the token’s circulating and total supply. When collateralized stables fail to maintain a balance between circulating supply and total supply, the stablecoin loses its peg.

Collateralized stablecoins are centralized. However, as long as the reserve backing the token does not run out of the needed liquidity, collateralized stables will maintain stability. At the moment, they are less risky investments than algorithmic stables.

Can Stablecoins Lose their Value?

It may surprise you to know that stablecoins can lose their value. That shouldn't discourage you. Even fiat currencies can lose value. Before buying a stablecoin, always do a background check on the token. Here are some questions you may want to find answers to. What mechanism does the token use to maintain its stability? Are the reserves backing the stablecoin solid? If centralized, is the company backing the stablecoin transparent enough? Does the attestation report reveal gaps in the stablecoin’s circulating supply?

These questions will help you make the right decision. While holding stablecoins come with some risks, their reduced volatility makes them less risky to hold than other cryptocurrencies. More so, holding stables come with many benefits that regular fiat currencies do not offer.

This article is written by Efe Bravo as a part of enter.blog's bounty program. Do you have an interesting topic, series or subject you think would be fitting for enter.blog? 

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