The stablecoin market continues to expand with new contenders entering the sector frequently. These unique digital assets have become a necessary tool for a large percentage of crypto users nowadays. If you are considering adding a stablecoin to your strategy, it’s crucial to understand that not all stablecoins are created equal. Here’s why most stablecoins aren’t as stable as you think.
What are Stablecoins?
Stablecoins differ from cryptocurrencies in many ways. For one, they maintain stability through the use of a reserve or other mechanism to maintain value outside of market capitalization. Interestingly, stablecoins are among the first types of blockchain assets to enter the market after Bitcoin.
It’s long been the desire of crypto developers and users to create stable decentralized assets. However, the journey to today’s advanced tokens has been filled with experimentation, successes, and failures. Over the last decade, major strides have been made and the stablecoins in use in the market are by far the most effective to date.
Why Do They Matter?
Stablecoins are vital to the crypto community for multiple reasons. For one, they provide a way for traders to exit volatility without exiting the decentralized economy. Before the introduction of modern stablecoins, traders needed to convert their digital assets into fiat currency to avoid major fluctuations in value. This process was cumbersome and would often require the use of CEXs (centralized exchanges).
The first stablecoin to gain popularity was USDT (TetherUSD). This now widely known stablecoin entered the market via integration into the Bitfinex CEX. The integration was possible because the firm behind TetherUSDT, iFInex Inc, also owns the exchange. The integration was a huge success.
Types of Stablecoins in Use Today
The introduction of stablecoins into exchanges changed everything. For the first time, traders could exit volatility without leaving the blockchain. This strategy was a major draw for users and soon other projects began to enter the market. Some platforms duplicated the fiat-backed model, while others tried other methods such as using gold.
Each approach has its advantages and disadvantages. Understanding the key differences between each type will help you to determine the best fit for your personal trading strategy. Here are the most common types of stablecoins in use today and why they may be the right option for some, but not all, scenarios.
Fiat Backed
Fiat-backed stablecoins use fiat reserves to back up their tokens. The best projects use 100% audited reserves and have full transparency with their user base. Fiat-backed stablecoins are denominated like fiat currency which makes them more familiar to users. They are currently the most common type of stablecoin in use by traders today, despite some significant drawbacks.
TetherUSDT can take credit as the first fiat-backed stablecoin to gain popularity. Tether remains a massive project and is the most popular stablecoin in the market today. This fiat-backed stablecoin has spawned dozens of copycat projects and is integrated into most major CEXs currently.
Notably, TetherUSD’s story can serve as a case scenario for the market as the token has had major ups and downs in this strategy. As a pioneer, it’s been a learning experience that has included major growth alongside speedbumps such as going from 100% fiat-backed to a mix of fiat-backing and other paper assets.
Pros
There are some pros to fiat-backed stablecoins that make them a great addition to most traders’ arsenals. For one, they are simple to integrate into any system. These digital assets look like fiat currency and hold similar value. As such, they can be integrated into existing business systems, such as accounting, with little to no adjustments needed.
Fiat-backed stablecoins are readily available in the market. You can find them on nearly every exchange and they are now available in many different fiat versions including USD, YEN, and EURO. This added flexibility has helped stablecoins become an internationally recognized sector of interest within the blockchain industry.
You can send these assets internationally like Bitcoin which makes them more open than fiat currency directly. It’s far cheaper to send value internationally using stablecoins versus traditional methods. As such, large banks are experimenting with stablecoins to reduce transfer costs.
Cons
There are some drawbacks of fiat-backed stablecoins that are worth mentioning. These digital assets suffer from the same inflation that fiat currency is currently under. Fiat currency has seen inflation hit 30-year highs in many parts of the world. As fiat currency loses buying power, so do the fiat-backed tokens.
The main drawback to fiat-backed stablecoins is the need to trust the issuing party. These projects will usually have a centralized party or corporation that is responsible for maintaining the reserves. They will be responsible for conducting audits regularly and sharing information with the community.
Sadly there have been moments where the reserves of fiat-backed stablecoins have been short of their issuance. In these scenarios, stablecoins can fail. It’s also common for them to convert their project backing to include other assets to offset the lack of actual fiat currency on hand.
Fiat-backed tokens are subject to monetary policies indirectly because they rely on fiat currency. If politicians decided they want to print billions tomorrow and crash the value of the dollar, fiat-backed stablecoin hodlers would be in the same boat as their fiat counterparts.
As such, fiat-backed stablecoins are ideal for short-term use and integrations. They aren’t the best option for long-term savers due to their significant drawbacks.
Crypto-Backed
Crypto-backed stablecoins leverage blockchain asset reserves instead of fiat currency. Interestingly, this style of stablecoin was the first to hit the market in the early years. However, the complex nature of these projects has made creating reliable options a long journey for developers.
The first crypto-backed stablecoins leveraged Bitcoin reserves. The platforms would adjust the number of reserves they held to keep the value of the token pegged to $1 in value. The other strategy used by these platforms was to reduce or increase the circulating supply. Both approaches provided the same result, added stability.
Pros
The main advantage of a crypto-backed stablecoin is transparency. Unlike fiat or commodity-backed protocols that require a third party to secure reserves, crypto-backed stablecoins provide complete monitoring capabilities to all users without the need for an auditing firm. This lowers costs and improves user confidence.
Crypto-backed stablecoins provide the most censorship protection because they rely solely on decentralized assets. For example, multiple stablecoins leverage Ethereum reserves to remain stable. These projects will automatically adjust the amount of ETH they hold to ensure the token remains constant.
Cons
The obvious flaw in this approach is that it can be very difficult to use a volatile asset to keep another volatile asset stable. The majority of the time, this strategy is effective. However, during massive market downturns, it can be nearly impossible for a crypto-backed token to fill its reserves if the value of its current reserves is shrinking.
Many projects have failed due to similar circumstances over the last five years. The LUNA/UST crash is a recent example of a crypto-backed stablecoin that lost its peg and was unable to regain it because its backing asset also lost massive value at the same time.
Commodity-backed
Commodity-backed stablecoins use a variety of reserves such as gold, diamonds, oil, and more. These projects gain the advantages of the reserves they leverage which can often equate to long-term saving benefits. The most common style of commodity-backed token leverages gold reserves.
More advanced commodity-backed tokens will leverage a basket of reserves to help diversify their holdings and provide more stability. The multi-asset reserve approach has proven to provide many benefits including the ability to buffer against specific losses. For example, a gold-backed stablecoin would get the advantage of gold’s reputation as a stable asset.
Pros
Commodity-backed stablecoins offer some benefits that their competitors can’t match. For one, they are free from bad monetary policies in that they leverage unregulated or loosely regulated assets for reserves. This strategy provides protection from inflation making these stablecoins better suited for saving value.
Commodity-backed stablecoins have more flexibility which makes them more innovative than other options. There are currently many stablecoins that leverage gold and diamonds. Notably, the market may not be too far away from most industries having some stablecoins based on their offerings.
Cons
There are some drawbacks to commodity-backed tokens that you should consider. For one, they share the requirement for auditing and centralization as fiat-backed projects. As such, it’s vital that you only leverage commodity-backed stablecoins that are reputable and trustworthy.
It’s more difficult to find commodity-backed stablecoins on established exchanges. As such, they aren’t as popular with traders as they have far less liquidity than fiat-backed platforms. The main concern you need to address with a commodity-backed stablecoins is transparency. Only participate in projects that offer real-time insight into the network.
Future of Stablecoins
The success of stablecoins isn’t a coincidence. Traders use these assets daily and there is a growing demand for these tools. The future of stablecoins is bright with major advancements made recently in the concepts and technologies leveraged by these platforms. The latest iteration of the stablecoin offers more to users.
Safehaven Tokens
It took developers 14 years to create the first functional safehaven tokens. Safehaven tokens operate like stablecoins in that they leverage reserves to escape volatility. They improve on the concept of the original stablecoin by introducing smart contract protections into the equation.
These protections focus on the vital aspects of a project including decentralization, whale manipulation, asset value protections, and voting rights. The most popular safehaven token in the market today is the META 1 Coin. The coins founder, Robert P. Dunlap leveraged the decades of trial and error made by previous stablecoins to create META 1 Coin.
Protections that Matter
To see the difference between early stablecoins and safehaven assets, you simply need to review the added protection used by projects such as META 1 Coin to enhance stability and long-term community confidence. Here are the top protections that make META 1 Coin the most advanced stable digital asset to launch to date
Protect The Token Value
A stablecoin can’t exist if it can’t remain stable. Stablecoins in the past have had to solely rely on their reserves and circulating supply to achieve asset stability. META 1 Coin introduces a few other ways that have proven to be highly effective at eliminating volatility from the project.
For one, all trades must meet the minimum token asset value to be complete. The system will prevent any trader from dumping their bags which prevents large-scale pump and dump schemes. Alongside the asset cross-reference mechanism, the protocol ensures all traders are humans and not trading bots or firms.
This strategy reduces trading volume which also reduces volatility. When coupled with the platform’s $5M token limit, it’s easy to see how safehaven tokens raise the bar in terms of user protection and long-term store-of-value characteristics. The token limit is a first in the market and has proven to be a great way to prevent whale manipulation.
Leverage DeFi to Generate Wealth
Another major improvement to the stablecoin concept has come in the form of DeFi options. The DeFi options offers users a combination of ways to generate low-risk passive income without losing their original assets. As such, safehaven tokens that offer features such as DEXs and staking, continue to gain popularity.
Now You Know
The journey to create the ultimate stable digital asset has not been an easy one. Many projects and traders have sacrificed to get to the point where the market is today. Thankfully, you don’t have to do the heavy lifting as projects like META 1 Coin leverage decades of developments to offer a new level of stability to users seeking to expand their ROIs