What are Stable Coins and why you should care

Stable Coins are cryptocurrencies designed to resist the volatility of the crypto-currency markets by tying their value to FIAT currency through a variety of means. In short, Stable Coins hope to bring (Surprise!) stability to the crypto market by creating a safe and reliable store of value that can help hedge against volatility as well as removing some of the hurdles of the mainstream adoption of crypto-currencies.

With Bitcoin’s price fluctuating up to 20% over the course of a day in some cases, it makes sense that skilled traders (perhaps like yourself) would need a safe place to store value/profits in the event they should ever find time to step away from price charts and partake in normal human activities like sleeping or spending time with their families.

To the second point of mass adoption, volatility has remained the largest obstacle to making a crypto-currency that can be used as money, on a large scale. A big part of the allure of developing a successful Stable Coin is the fact that it could potentially be the first crypto-currency to see widespread use in everyday trades and transactions.

Bitcoin may never be used for buying the proverbial cup of coffee, but stable coins have a chance to do just that. There is an obvious need for a Stable Coin and, in all likelihood, that need will be filled by whatever individual coin is deemed the best by the community that chooses to embrace it. Meaning there is a very good chance that the most stable of the stable-coins will reign supreme across most major exchanges.

How do they work?…. They do work, right?

There are a few different approaches to ensuring that a stable coin’s value remains consistent with a set amount of FIAT currency that function with varying amounts of efficacy and decentralization. The most basic model would be collateralized by FIAT similar to Tether (USDT). In simple terms, FIAT collateralized stable coins are backed by a physical FIAT account that maintains $1 USD for every coin minted. This system is heavily centralized and at high risk for manipulation as the integrity of the entire system is intertwined with the integrity and reputation of the account custodian, which is obviously an issue.

The next option would be a token backed by another cryptocurrency instead of FIAT funds, this offers a more decentralized collateral but at the price of a few significant drawbacks. Crypto-currency being inherently volatile means that in order to ensure stability, a stable coin would have to over-collateralize, meaning that every token generated (again worth $1 USD) would have to be backed by $2-$3 USD of another cryptocurrency. Users are usually incentivized to do this through the promise of earned interest but it is far from a perfect system and in the end, only makes the Stable Coin resistant to volatility, not immune to it.

Lastly, there are a few projects aiming to create a non-collateralized Stable Coin. The process by which these types of coins maintain value parity (aka 1 coin to $1) is by instituting a complex algorithm, that continuously adjusts token supply. When it is determined the token price is too high relative to a dollar, new coins are minted and when the price relative to $1 USD rises too low, tokens are repurchased from holders and destroyed. One of the major issues with this system is the means by which it decides exactly what a token is worth when compared to $1 USD. Without centralized FIAT or over-collateralized cryptocurrency as a backing, the relative value of each token is up for debate and the mechanisms that are currently available to correct this can make the coin vulnerable to crashing.

Some of the current and upcoming Stable Coins to keep an eye on;

TUSD

TrueUSD is Fiat-Collateralized

Traded on Bittrex but will soon be added to Binance (5/22 @ ~4:00 AM UTC).

Paired with BTC, ETH, and USDT

The main selling point of TUSD is that, while it is Fiat backed, the collateral is held by multiple different partners, in accounts that are audited monthly. TUSD has proved to maintain a great deal of stability since it’s inception with the exception of a jump to $1.32 per token after being announced it would be issued on Binance, and this was corrected within a few hours.

USDC

Fiat-Collateralized

Backed by Goldman Sach’s for use initially on Poloniex

Partnered with Bitmain

Circle USD is a new project and there is a great deal of specifics that have not been verified yet. The project is backed by some big names and a lot of funding. With goals of wallet interoperability (Think Cash App, Venmo, etc.) and instantaneous global payments, this is definitely a project to watch.

USDT

Tether is Fiat-Collateralized

The reigning champ with an approximate 24-hour trading volume frequently around $2,400,000,000.

Available on most major exchanges

Paired with BTC and ETH, but also a multitude of other coins to include LTC, NEO, and XRP

Tether is the first successful stable coin and has seen widespread adoption among exchanges. It has remained stable over years of use and is collateralized by FIAT assets held by Tether Limited. While the veracity of Tether’s claims to have all tokens backed by the equivalent amount of USD has come into question recently, Tether seems to remain the king of stable coins for the time being.

MakerDao DAI

ETH collateralized

Available on a number of smaller exchanges, most notably IDEX

Recently partnered with AirSwap

MakerDao is an interesting and ambitious project but it does suffer from the pitfalls associated with crypto backed stable coins. The token has experienced a good amount of instability when compared to USD over the past few months.

The Takeaway; Stability has risks

That about covers it. I believe that the future is bright for stable coins and they will continue to see adoption and increasing use cases as the crypto community grows and is more and more incorporated in the mainstream.

Stable coins will continue to grow and develop in ways that hopefully allow more of the population easy access to crypto-currencies as well as allow seasoned traders some shelter from the storm of volatility. Stable coins will likely be a very valuable tool for anyone in the crypto space in the near to immediate future.

The opposite side of that coin (Yeah, I said it) is that, as more stable coins are developed, there may be new, different, and (dare I say) less stable ways of ensuring tokens maintain their $1 USD parity. It will be more important than ever to make sure that you have performed diligent research before using any stable coin as a place to park money.

If you ever have any doubt about that, imagine explaining to your friends that you lost 50% of your portfolio because you stored it in Titanic Coin, the unsinkable stable token, right before it took a deep and permanent dive.

Disclaimer:

As always, this is not financial advice. Do your own research. Take responsibility for your own financial decisions or consult a trusted and reputable financial professional who can offer financial guidance.