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USDT vs. USDC vs. DAI: What are the similarities and differences?

By Rita
30 Sept 2024
14 min read

Stablecoins are cryptocurrency tokens whose exchange rate is linked to an asset, such as a dollar, euro, or gold. Linking to an asset means that the value of a stablecoin depends on the cost of the linked asset. Theoretically, this makes stablecoins a less volatile form of cryptocurrency.

Unlike other cryptocurrencies, such as Bitcoin or Ethereum, which can experience significant price fluctuations, stablecoins are designed to minimise volatility and provide a reliable store of value. However, there are examples when stablecoins have lost their bindings, so the stability of their price is not guaranteed.

Stablecoins represent a link between fiat and cryptocurrencies. They are used for various purposes and are an essential part of modern crypto trading. Therefore, regardless of whether you plan to trade stablecoins, it is important to understand the mechanism of operation of this type of cryptocurrency.

In this article, we will tell you what stable coins are, look at the leading projects, and explain the reason for their popularity.

What stablecoins are?

The idea of creating stablecoins was not new. In the classical banking system, such a mechanism is called a fixed exchange rate. See our Beginner's Guide: Navigating the World of Stablecoins here.

A stable cryptocurrency is tied to an official asset that has a fixed value in the real world. As already mentioned, it can be gold, national currency, oil, etc. The emergence of digital money, which is not subject to sharp fluctuations in the exchange rate, led to an increase in the turnover of coins and had a beneficial effect on trading operations with them.

The first cryptocurrency linked to a third-party asset (Realcoin) appeared in November 2014. The initiator of the startup was J. R. Willett, who two years earlier published an article The Second Bitcoin Whitepaper. It described the ideas and algorithms for developing such tokens. In 2015, Realcoin was renamed Tether (USDT).

There are 3 major types of stablecoins:

1. Crypto-backed stable coins.

2. Fiat-backed stablecoins.

3. Algorithmic stable coins.

Several stable coin mechanisms are used to achieve price stability:

Tokenization of fiat money. The price of the coin correlates with national currencies as 1:1. Each altcoin corresponds to one USD, EUR, JPY, etc., which are on the account of the issuing company.
Support the course with material values. The prices of stablecoins are provided by natural resources, precious metals, and so on.
Algorithmic stable cryptocurrencies. Here, the price of a coin is regulated through a change in the volume of money supply. To reduce the exchange rate, assets are issued, and to increase it, tokens are burned. The control is carried out automatically using smart contracts.
Support for other cryptocurrencies. The underlying asset is more stable and liquid coins. These are mostly BTC, ETH, or XRP.




Advantages and disadvantages of stablecoins


Of course, stablecoins have both advantages and disadvantages.

Pros of Stablecoins:

A larger volume of emissions. The organizer of the stablecoin issue can issue any number of tokens for which he has collateral. This is how stablecoins differ from conventional cryptocurrencies, the volume of issue of which is usually set in advance and is limited.
Resistance to manipulation of the course. The rate of stablecoins is subject to speculative effects to the same extent as the price of the underlying asset. The scheme of artificial appreciation of the cryptocurrency exchange rate is followed by a price collapse (Pump & Dump) if stablecoins do not work well.
The opportunity to invest in various assets. By purchasing stablecoins, an investor can diversify investments by purchasing "coins" linked to various underlying assets.



Cons of Stablecoins:

The possibility of manipulation by the issuing company. Stablecoins are issued and provided with assets by a certain company, and theoretically, there is a possibility of manipulation and fraudulent actions on its part.
Relatively low volatility. This characteristic can be both an advantage and a disadvantage of the "coin". Low volatility allows you to save investors' funds.

Why stablecoins are growing in popularity?

Stablecoins backed by fiat currency have become an integral part of the blockchain financial ecosystem, guaranteeing stability and liquidity for users. Despite the name, such assets do not always remain stable. This opens up significant opportunities for arbitration. This is especially true for coins linked to the value of the euro.

One of the key indicators of the growth and adoption of stablecoins was the volume of their issuance. However, with the adoption of MiCA regulations in Europe, the future of these coins may become unpredictable. Experts believe that the dynamics of their circulating supply can change depending on market conditions and regulatory actions.

According to experts, it is also necessary to track the number and volume of stablecoin transfers, as they reflect the actual use of these assets for various purposes - from transactions on decentralized platforms (DeFi) to trading on centralized exchanges. High figures with a low number of active users may indicate an artificial overestimation of volumes or overestimation. Thus, stablecoins have become an important element of the blockchain infrastructure, providing stability and liquidity for traders.

Conclusion

Stablecoins are a promising asset, as they create a bridge between the world of cryptocurrencies and real money. There are stablecoins, the benefits of which are great for the entire crypto market. They are convenient for conducting trading operations and profit-making. They also have the advantages of fiat and are exchanged practically on exchanges where the corresponding tokens are presented.

Stablecoins are growing in popularity and it is common to buy and hold stablecoins today. Remember, as with any form of cryptocurrency, it's essential to do your research before committing funds and making a trade.


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