When you are an investor, you are likely to come across the most renowned StableCoins Tether, USD coin and DAI in the cryptocurrency world. They are mainly used to solve the volatility problem of cryptocurrency by backing it up with real-world money or commodity or algorithms or cryptocurrency. Also, they can be used between cryptocurrency exchanges for payments and transfers. It makes it very easy for cross-border transactions without the pain of undergoing financial administrative burdens and significant transaction fees by a centralized organization such as banks or financial institutions. Nonetheless in the long run, since it is backed by fiat currency, it is definitely not worth investing in StableCoins as the price doesn’t fluctuate as it would with a cryptocurrency. However, can be used as a bridge between fiat money and cryptocurrency, taking over the best of the two worlds.
Why StableCoins instead of Fiat Money?
StableCoin has a fixed value usually equivalent to a dollar(or commodity or algorithms or cryptocurrency), which means 1 USDC=1 Dollar where USDC(USD Coin) is a stablecoin backed by an exactly equal amount of Dollar as a trust factor for people to start using stablecoins in their daily lives. Fiat money as we all know is being controlled by banks or financial institutions and is centralized where the power lies on one organization. On the other hand, Cryptocurrencies like Bitcoin and Ether have a splurge in their price every minute which makes them unrealistic to be used in day-to-day transactions instead of fiat money. So, they need to be treated like stocks. In this scenario, what we really need is a decentralized payment where the power doesn’t lie on one organization but spread across and also to be usable in the crypto space like real money that has a value like any currency. Thus, Stablecoins were introduced into the market to bridge this gap.
Real-world usage of StableCoins
Stablecoins can be used in various scenarios that are discussed below :
- To back up the currency crash of any country due to inflation. For example, the hyperinflation in Venezuela that commenced during 2016 and until now every year their inflation rate increases multifold with a total of 4085% last Dec 2020. Consumer prices have risen 70% that their money has no value anymore locally and globally. To mitigate this kind of risk, we can store them as StableCoins for holding purposes and can convert any fiat currency whenever required for minimal fees.
- Day-in-Day-out currency for all shopping, coffees, entertainment etc., we can use stablecoins for payments provided it is accepted by the vendors.
- Simplified recurring payments by organizations to their employees. All they have to do is to create a smart contract to pay employees every month on the same day with so many stablecoins. Companies may benefit a lot if they paying for Global employees which might dramatically reduce the conversion fees for every country. Similarly, we can use it for paying the monthly rental, subscriptions, power bill, mobile bill etc.,
- Remittances for any P2P transactions through cross-border is really hectic with Western Union, Forex etc., The conversion rate fees + transaction fees + whatever fees in sending a wire transfer can be done at a very low rate when compared relatively with stablecoin transfer.
When do I cash out my Stablecoin?
Anytime through the crypto exchange through which you used it buy stable coins. You can use the same exchange to cash it out to any fiat currency based on the country in which you reside. The wire transfer fee for the bank, Trading fees on the exchange, withdrawal fees from the exchange and liquidity cost are all at their minimal cost with a maximum of 0.1%. Keep in mind that you cash it out only when you need it, but to secure it, it needs to be as stablecoin in your exchange or wallet. For trading purposes, it needs to be as cryptocurrency as the price may increase or decrease in the crypto space.
Tether USDT is the first of its kind to introduce the concept of StableCoin into the market in 2015. It was formed by Tether Limited and was initially run on Omni protocol that is similar to Bitcoin blockchain. Currently, it has been leveraged to run on the ERC20 network and TRC20 TRON network as well. Therefore most of the values are being exchanged in the Ethereum network rather than on Omni. So they remain the “Go-to” stablecoin in terms of usage and adoption but not to mention the fact of the shadiness of their asset backup recently. This coin is ranked 3rd in place next to Bitcoin and Ethereum. During the year 2017, Tether was ranked 27th with a $1.4 Billion market cap and $1.9 Billion daily trading volume. In 2020, It ranked 4th with a $4 Billion market cap and $24 Billion in daily trading volume. Eventually, in 2021, Tether ranks 3rd with a $26 Billion market cap and $115 Billion in daily trading volume.
USD coin or USDC are made by Centre and backed up by renowned companies like Goldman Sachs, Silver Gate, US Bank Corporation. It was formed in 2018 by Circle and CoinBase who are legitimate companies in the crypto world. USDC is also pegged, 100% with the US dollar and transparency is their biggest advantage that attracts more institutional investors. Every month, every single dollar that is backing the USDC is audited by a top accounting services firm called Grant Thorton LLP in terms of the network used, Ethereum blockchain and also Algorand, Solana and Stellar. In terms of USDC’s progression since 2018 Oct, it was ranked 58th with $125 Million on market cap and $283 Million in daily trading volume. It leveraged itself to 23rd rank in 2020 with a $518 Million market cap and $335 Million in daily trading volume. However, in 2021 it has reached rank number 12 with a $5.8 Billion in market cap and $1.4 Billion in daily trading volume. Though this coin is less in volume than Tether, it is very transparent and less shady when compared to the former.
Dai was made by MakerDAO which is a stablecoin operating completely on the Ethereum blockchain using smart contract algorithms. Unlike USDC and USDT, this is completely backed by Ethereum and other coins as collateral, which is ideally, crypto collateralized. Initially, it kicked off as SAI in 2017 when ETH was the only collateral but it leveraged itself to multi-currency collateral in 2019 and was renamed as DAI. So how does the crypto collateral actually back it up is, that the MakerDAO protocol has a smart contract algorithm that uses the arbitrage essentially when the price differs from $1. This involves burning or minting the DAI supply to find the balance and the price stays close to $1. Therefore it is a fully decentralized stablecoin that is unique. It doesn’t rely on third-party trusts because it is fully defi. For this reason, it is the most sought one in the defi ecosystem. Ultimately, the other cryptos’ that can be used to collateralized DAI are ETH, USDC, KNC, WBTC, COMP, LINK, BAL and LRC etc.,
The advancement of DAI in the crypto market during 2018 was maintaining a 99th rank, $56 Million market cap with $4.5 Billion in daily trading volume. While during 2020, it was ranked the 64th with $105 Million in market cap and $17 Million on daily trading volume. During early 2021, it ranked 27th with $1.6 Billion in market cap and $208 Billion in daily trading volume.
Finally, all of these stable coins seem pretty much similar as they relatively hold their peg dollar. They have enough liquidity and availability but if you had to choose one amongst them, it all depends on the investor’s risk level and use case. In the long run, when you look at each of these tokens they have their own pros and cons but they can be used in different scenarios as such or combinations.