Stablecoins have been talked about for their ‘stability’ due to their fiat back-up that makes them an interesting option to explore for adding to your portfolio.
Cryptocurrency is volatile. Prices can drop and rise at any moment because a central authority does not back crypto. The market demand determines prices, and there is no government to “bailout” cryptos to prevent collapse.
Enter fiat-backed stablecoins. These could be considered the best of both worlds. Fiat currencies back Digital currencies, which keeps the price stable. In this blog, we take a look at the different types of stablecoins.
Stablecoins are backed by fiat currencies in a 1:1 ratio, meaning one stablecoin represents one fiat. For example, 1 USDT is equal to 1 USD. The fiat currency gets deposited into a bank account. The stable coins get issued to the user in a similar ratio. When the user wants to liquidate their stablecoins back into the fiat currency, those stablecoins get destroyed. The fiat currency is issued to them, again in an equal 1:1 ratio.
Tether is the company behind fiat-backed USDT. Tether is a subsidiary of iFinex, the company that owns crypto exchange Bitfinex.
USDT was founded in July 2014 by Brock Pierce, Craig Sellars, and Reeve Collins, Tether (USDT), originally known as “Realcoin”, is a stablecoin, a type of cryptocurrency which aims to keep cryptocurrency valuations stable.
USDT is the largest stablecoin by trading volume and market cap. It was introduced in 2014 and was the dominant stablecoin in the market until 2017 when USDC got introduced. Tether’s lack of transparency has hurt its reputation, and some people question whether it is backed by the USD at all.
USDT is available on almost all top cryptocurrency exchanges and can be traded against multiple pairs.
Tether has faced its share of controversies.
- There are no regular publicly released audits to verify that the USD backs USDT.
In 2019, however, Tether migrated USDT from its blockchain to Ethereum, and in 2020 it migrated again to OMG Network. These moves will provide greater transparency.
USD Coin (USDC)
Circle Ltd is the company behind USDC, the fiat-backed stablecoin released in 2017. USDC is also the official stablecoin of crypto exchange giant Coinbase, the world’s most regulated exchange.
Circle Ltd publicly releases annual audits to verify that the stablecoin is backed 1:1 with the USD. All transaction details and information such as the coin’s supply can be easily verified on the Ethereum blockchain.
While USDC hasn’t faced any controversies like USDT, and it can be publically verified, it does not have the same market cap or trading volume as USDT.
Fiat-backed stablecoins are centralized because they rely on a trusted custodian to store the fiat in reserve. There is, however, an alternative type of stablecoin that is decentralized. Coins such as Dai are crypto-backed stablecoins, not fiat-backed. A fiat-backed stablecoin has a 1:1 ratio, but because crypto is volatile, a crypto-backed stablecoin has a different ratio to keep the stablecoin level. There is more than one crypto coin in reserve to counteract the volatility.
Crypto-backed stablecoins are decentralized, and they can liquidate much faster than fiat-backed stablecoins. There are some cons, however. Crypto-backed stablecoins are not as price-stable as fiat-backed stablecoins, since they rely on other crypto’s health. They can be auto-liquidated if the backing crypto’s price crashes.
Trade USDT and USDC
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Please note that this is not trading advice. We recommend you to carry out your own research before making any trading decisions. This article is for informational purposes only.