What are Stablecoins?
Navigating through the cryptocurrency world can be overwhelming with all the available options in the market. Coupled with frequent fluctuation of cryptocurrency prices, investors tend to abstain from investing in crypto. This article will introduce you to a low volatility version of cryptocurrency – also known as stablecoin.
What are Stablecoins?
Stablecoins are stable cryptocurrencies that are backed by real-world assets such as fiat currency and precious metals. Their daily fluctuation is almost negligible, which helps to protect you from market volatility and risks.
There are 4 types of stablecoins:
- Precious metals-backed
For fiat, precious metals and crypto-backed stablecoins, they are normally pegged to the respective range of assets. E.g., U.S. Dollar/Gold/Ethereum. The entities behind these stablecoins will hold the respective assets in reserves. Regular audits will be conducted by an independent company to ensure a proper collateralized position is maintained.
Algorithmic stablecoins are not backed by any collaterals and are instead managed by an algorithm. For instance, more supply of stablecoins would be released automatically if the stablecoins’ price is higher than the target price.
Here are some popular stablecoins in the crypto market:
Tether is the world’s first stablecoin and is considered the most popular stablecoin with a market cap of more than $62 billion (as of 21 June 2021). USDT is pegged to the price of U.S. Dollar via maintaining reserves with the equivalent value in circulation.
U.S. Dollar Coin (USDC)
In similar fashion to Tether, USDC is also pegged to the price of U.S. Dollar. It was launched in 2018 in a joint effort by Coinbase and Circle, two reputable companies in the crypto industry. Financial transparency is established with monthly attestations on U.S. Dollar reserves done by top 5 accounting services firm, Grant Thornton LLP.
DAI is a crypto-backed stablecoin that maintains a soft peg to the U.S. Dollar. It is an ERC-20 token on the Ethereum blockchain that can be purchased from both centralized and decentralized exchanges. There is no central authority overseeing the whole system and different cryptocurrencies are used as collateral to increase DAI’s stability. You can read more about DAI here.
Advantages of Stablecoins
✓ Safeguard against volatility
Cryptocurrencies are not widely used as they are too volatile to be accepted by the public. With stablecoins, it acts as a solution to integrate crypto with the existing financial markets.
✓ Quick speed of transactions
Traditional transfer methods are slower than transactions done on the blockchain network as they must go through a third party. With stablecoins, third party fees are eliminated and you only have to pay the low network fees. You can easily remit money to your family overseas, making stablecoins borderless.
Disadvantages of Stablecoins
✕ Third-party audits required
Reserves that store the collateral should be checked and audited for investors to know the riskiness of the coin. However, many stablecoin issuers do not provide this transparency.
✕ Association with underlying asset
There is a risk where the underlying asset may crash in value. A price fall of the pegged asset would affect the value of the related stablecoin. This is uncommon but there is always a possibility that this would happen. An example is Black Wednesday, where a collapse in the pound sterling happened in 1992. If something similar happens to the U.S. Dollar, stablecoins pegged to it would be severely affected.
How to Earn Crypto with Stablecoins
Since the prices of stablecoins do not move much, the best way to earn money with stablecoins is via a crypto interest account. You can loan out your stablecoins via cryptocurrency lending platforms such as Hodlnaut and earn interest of 10.5% APY.
These platforms generally loan out your crypto assets to vetted financial institutions at an even higher interest, thus able to reward you with a rate that is better than traditional banks. Besides stablecoins, you can earn interest on other popular cryptocurrencies such as Bitcoin and Ethereum.
For those who are unfamiliar with the blockchain technology and find it hard to adapt to volatile crypto market conditions, you may consider investing in stablecoins. Stablecoins can also be a temporary alternative for crypto enthusiasts to park funds when noticing the market heading towards a downward trend. Last but not least, always remember to do your due diligence on the crypto that you intend to invest in and the platform too!