Stablecoins are tokens that most users who invest in virtual currencies will come into contact with. Why can these tokens have the same value as legal currencies? Is there a risk of value collapsing?
If I want to start investing in virtual currencies today, how should I choose these stablecoins? Where can I buy these tokens? Today, this article will give you an in-depth understanding of stablecoins step by step, so that you can invest without stepping into pitfalls!
What is a stablecoin?
Stablecoin is a type of cryptocurrency that is designed to maintain a "stable value."
Compared with other cryptocurrencies such as Bitcoin and Ethereum, the main feature of stablecoins is that their value is linked to "a certain asset" to a certain extent, such as:
1 Fiat USD = 1 USD stablecoin.
1 fiat euro = 1 euro stablecoin.
Through the peg mechanism, stablecoins have important application value in the fields of blockchain and cryptocurrency.
Why are stablecoins important? What are the important features?
The importance of stablecoins is mainly reflected in the following functions:
Web2 and Web3 media: Due to the high volatility of cryptocurrencies, the exchange rate risk of directly exchanging fiat currencies for cryptocurrencies is high. Stablecoins play an important role between fiat currencies and cryptocurrencies.
Tool for storing value: The value of stablecoins is relatively stable, so when the market fluctuates violently, it can be used to store value and avoid losses caused by cryptocurrency price fluctuations.
Cross-border transactions and payments: It can replace the complicated procedures of bank wire transfers to a certain extent and directly use stable coins for transaction payments. Recently, VISA has also begun to gradually strengthen its cooperative relationship with stable coins.
The foundation of DeFi: Stablecoins are an important component of DeFi. In order to obtain stable income, users are often used in DeFi for various applications such as liquidity mining, lending, and trading.
What are stablecoins? What's the difference?
The main stablecoin types currently in the cryptocurrency market include:
Fiat-collateralized stablecoins
The value of this type of stable currency is supported by financial institutions or central institutions with legal currency reserves. In addition to legal currency, other forms of collateral can include precious metals such as gold and silver, and commodities such as crude oil.
The reserves of this currency, which is backed by fiat currency, are typically audited regularly to prevent false money printing.
Common legal currency-collateralized stablecoins include: U.S. dollar stablecoins (USDT, USDC, BUSD), Euro stablecoins (EUROC, EURt), etc.
Cryptocurrency Collateralized Stablecoins
The value of a cryptocurrency-collateralized stablecoin is primarily backed by cryptocurrency as a reserve.
The issuer of this stable currency usually requires users to deposit a certain amount of cryptocurrency as collateral in exchange for a corresponding amount of stable currency. When the user redeems the stable currency, the corresponding amount of cryptocurrency needs to be returned.
Common cryptocurrency-collateralized stablecoin: DAI.
算法穩定幣
The stability of the value of algorithmic stablecoins is achieved by regulating supply and demand through algorithms and smart contracts. The price of this stablecoin changes according to the market mechanism, and its supply and price are controlled by algorithms and smart contracts.
The most famous algorithmic stablecoins include: UST (which has been reinvented as USTC), FRAX, and others.
The value of an algorithmic stablecoin depends on the design and implementation of the algorithm. If there are loopholes in the algorithm, it may cause the stablecoin to collapse.
The Terra project's algorithmic stablecoins UST and LUNA are a pair of stablecoins that support each other.
UST: It is a stablecoin pegged to the US dollar.
LUNA: is a token used to mint and burn UST.
When the price of UST is less than 1 USD, users can exchange 1 USD of LUNA coins for 1 UST.
When the price of UST is higher than 1 USD, users can exchange 1 UST for 1 USD of LUNA coins.
2022 年 5 月，Terra 項目的算法穩定幣 UST 因許多大戶進行大量拋售，發生了脫鉤事件。
Among them, due to the arbitrage mechanism of UST being exploited, insufficient reserves of UST, and the decoupling of UST causing market panic, a large number of users continued to sell UST, further exacerbating the decoupling, and ultimately led to the death of LUNA and UST.
So overall, fiat currency-collateralized currencies are generally more robust, while algorithmic stablecoins have a higher degree of decentralization.
Are stablecoins safe? Is there a risk of collapse?
From the above cases, we can see that whether stablecoins are safe depends on the mortgage assets and algorithm design behind them. Legal currency-backed stablecoins run the risk of insufficient assets, while algorithmic stablecoins have the possibility of out-of-control collapse.
Important: Generally speaking, fiat-collateralized stablecoins are safer because their value is backed by fiat currency as a reserve.
Therefore, stablecoins still have the risk of collapse, which mainly comes from the following aspects:
Insufficient value reserves: If the value reserve of a stablecoin is insufficient to support its issuance, it may lead to the collapse of the stablecoin, especially when cryptocurrency is used as collateral, and its value is usually highly volatile.
Hacking attack: If the reserve assets of the stablecoin are attacked by hackers, it may also cause the stablecoin to collapse.
Algorithm loopholes: If there are loopholes in the algorithm of an algorithmic stablecoin, it may also cause the stablecoin to collapse.
Most Popular Crypto Stablecoins
USDT - Tether Tether currency
The stablecoin with the largest issuance and circulation.
The adoption of a legal currency mortgage model means that it is backed by sufficient U.S. dollar reserve assets.
The first choice for market trading and a must-buy stablecoin for beginners.
It has been criticized for its lack of transparency regarding its actual U.S. dollar holdings.
USDC - USD Coin
It is supported by Coinbase and Circle and has a high reputation.
It also adopts 1:1 US dollar mortgage and publishes reserve certificates every month.
It is widely used in the field of decentralized finance.
BUSD - Binance USD (minting has stopped)
Powered by Binance and tightly integrated with the buying platform.
1:1 USD mortgage, reviewed monthly by an audit agency.
The stablecoin that is most integrated with the BNB ecosystem.
BUSD issuer Paxos faces the possibility of being sued by the SEC, claiming that BUSD is an "unregistered security"
Currently, BUSD has stopped minting, and Binance will stop supporting the BUSD token in 2024.
Paxos will end BUSD redemptions by February 2024.
DAI - DAI Stablecoin
Generated through the over-collateralization mechanism of the Maker protocol, and the collateral is cryptoassets.
It embodies the spirit of decentralization.
Often used in DeFi protocols.
TUSD - TrueUSD
Legal currency collateral coins are deposited in banks for third-party auditing.
The cold wallet storage ratio is as high as 95% and is highly secure.
User assets are protected by FDIC insurance and have a relatively high degree of trust.
How to buy stablecoins
Currently, stablecoins can be purchased through the following methods:
Exchange: Currently, all mainstream cryptocurrency exchanges provide stablecoin trading services.
OTC Over-the-counter trading: Buy and sell directly with the holder through private transactions.
Stablecoin issuers: Some stablecoin issuers offer direct purchases of stablecoins.
in conclusion
In summary, cryptographic stablecoins are one of the important bridges between the Web2 and Web3 worlds.
As a stable asset, stablecoins can allow cryptocurrencies to gain more applications and support in daily life, and have the potential to change global financial payments.
But at the same time, users must also pay attention to the risks brought by encrypted stablecoins, such as insufficient reserves and algorithm failure, which may cause the value of stablecoins to return to zero overnight. When users use stablecoins for investment operations, Be sure to diversify your risk and don't bet all your assets on a single currency because of its stable value.
