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Everything You Need To Know About Stablecoins - Piggy Cards Blog

Everything You Need To Know About Stablecoins

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What are stablecoins?  

Stablecoins are a type of cryptocurrency that are designed to maintain a stable value relative to a particular asset or basket of assets, such as the US dollar, euro, or gold. This stability is achieved through various mechanisms, such as pegging the value of the stablecoin to a particular asset, or through algorithmic adjustments to the supply of the stablecoin.

Stablecoins offer several potential benefits over traditional cryptocurrencies, including lower volatility, greater liquidity, and increased usability for everyday transactions. They are particularly useful for individuals and businesses that need to make transactions in cryptocurrency but want to avoid the price fluctuations associated with other cryptocurrencies such as Bitcoin or Ethereum.

Some popular stablecoins include Tether (USDT), USD Coin (USDC), and Dai (DAI). However, it’s important to note that stablecoins are not without risks, and there have been concerns about their transparency, security, and regulatory compliance.

Why do we need stablecoins?

There are several reasons why stablecoins are becoming increasingly popular and why they are seen as a useful addition to the cryptocurrency ecosystem:

  1. Reduced volatility: One of the main advantages of stablecoins is that they offer a stable value relative to an underlying asset, such as the US dollar. This can help reduce the volatility that is often associated with other cryptocurrencies like Bitcoin, making stablecoins more attractive for use in everyday transactions and for storing value.
  2. Increased usability: Stablecoins can be used in a similar way to traditional fiat currencies, such as the US dollar, but with the added benefits of being digital and decentralized. This makes them more accessible and useful for individuals and businesses that want to use cryptocurrency for payments and other transactions.
  3. Lower transaction costs: Stablecoins can be used to send and receive payments across borders quickly and at a lower cost than traditional methods like bank transfers or wire transfers. This is because they are not subject to the same fees and delays that can come with traditional financial institutions.
  4. Increased liquidity: Stablecoins can be traded on cryptocurrency exchanges and used as a trading pair with other cryptocurrencies, making them more liquid and easier to buy and sell compared to other cryptocurrencies that may not have a stable value.

Overall, stablecoins are seen as a useful addition to the cryptocurrency ecosystem because they offer many of the benefits of traditional fiat currencies, such as stability and liquidity, while also leveraging the benefits of blockchain technology, such as transparency and decentralization.

There are so many stablecoins, what are the differences?

Overall, there are 3 types of stablecoins listed below,

  • Fiat-Collateralized Stablecoins

Fiat-collateralized stablecoins are a type of stablecoin that are backed by a reserve of fiat currency, such as the US dollar or the euro. This means that for every unit of the stablecoin that is in circulation, there is an equivalent amount of fiat currency held in reserve to back it up.

The process of creating a fiat-collateralized stablecoin typically involves purchasing and holding the underlying fiat currency in a reserve account. The stablecoin is then issued to users based on the value of the fiat currency held in reserve, with the goal of maintaining a stable value relative to the underlying currency.

There are several fiat-collateralized stablecoins available in the market, some of the most popular ones include:

  1. Tether (USDT): Tether is one of the oldest and most widely used fiat-collateralized stablecoins, and is backed 1:1 by US dollars held in reserve. It is issued by Tether Limited, a company based in Hong Kong.
  2. USD Coin (USDC): USD Coin is a stablecoin backed by US dollars held in reserve. It was launched by Circle and Coinbase in 2018 and has gained significant adoption among cryptocurrency users and exchanges.
  3. TrueUSD (TUSD): TrueUSD is a stablecoin that is backed by US dollars held in escrow accounts, and is issued by TrustToken, a blockchain-based platform for asset tokenization.
  4. Paxos Standard (PAX): Paxos Standard is a stablecoin that is backed 1:1 by US dollars held in reserve, and is issued by Paxos Trust Company, a New York-based financial institution.
  5. Gemini Dollar (GUSD): Gemini Dollar is a stablecoin that is backed 1:1 by US dollars held in a State Street bank account, and is issued by Gemini, a New York-based cryptocurrency exchange.
  6. Binance USD (BUSD): Binance USD is a stablecoin backed by US dollars held in reserve, and is issued by Binance, one of the largest cryptocurrency exchanges in the world.

These stablecoins are typically used as a medium of exchange or a store of value, and are often traded on cryptocurrency exchanges alongside other cryptocurrencies like Bitcoin and Ethereum.

  • Crypto-Collateralized Stablecoins

Crypto-collateralized stablecoins are a type of stablecoin that are backed by other cryptocurrencies, rather than traditional fiat currencies. Here are some examples of crypto-collateralized stablecoins:

  1. MakerDAO (DAI): MakerDAO is a decentralized stablecoin platform that uses the Ethereum blockchain. The stablecoin, called DAI, is backed by a collateralized debt position (CDP) system, which allows users to lock up cryptocurrency assets as collateral and issue DAI stablecoins against them.
  2. Synthetix (sUSD): Synthetix is a decentralized platform that allows users to create synthetic assets, including stablecoins, using cryptocurrencies as collateral. The stablecoin, called sUSD, is backed by a pool of cryptocurrencies held in a decentralized smart contract.
  3. TerraUSD (UST): TerraUSD is a stablecoin that is backed by a basket of cryptocurrencies, including Bitcoin, Ethereum, and Terra’s own native cryptocurrency. It is issued by Terraform Labs, a blockchain-based platform for decentralized finance (DeFi) applications.
  4. BitShares (BitUSD): BitShares is a decentralized blockchain platform that allows users to create and trade stablecoins backed by cryptocurrencies. The stablecoin, called BitUSD, is backed by a collateral pool of BitShares (BTS) cryptocurrency.
  5. Kava (USDX): Kava is a decentralized platform that enables users to create stablecoins backed by cryptocurrencies. The stablecoin, called USDX, is backed by a collateral pool of Kava’s own cryptocurrency, called KAVA.

These stablecoins are typically used in decentralized finance (DeFi) applications, such as lending, borrowing, and trading on decentralized exchanges. They offer users the ability to access stablecoins without relying on traditional banking systems or centralized authorities. However, they also carry some risks related to the volatility of their underlying collateral and the complexity of the decentralized systems that support them.

  • Algorithmic Stablecoins

Algorithmic stablecoins are a type of stablecoin that use complex algorithms to maintain a stable value, rather than being backed by fiat currency or other assets. Here are some examples of algorithmic stablecoins:

  1. Ampleforth (AMPL): Ampleforth is an algorithmic stablecoin that adjusts its supply in response to changes in demand, with the goal of maintaining a stable value. When demand for AMPL increases, its supply expands, while a decrease in demand causes the supply to contract.
  2. Empty Set Dollar (ESD): Empty Set Dollar is an algorithmic stablecoin that is designed to maintain a value of $1 through a system of rebasing. The supply of ESD expands or contracts based on market demand, with the goal of keeping the price stable.
  3. Frax (FRAX): Frax is an algorithmic stablecoin that is designed to maintain a stable value of $1 through a combination of algorithmic adjustments and collateral backing. The stablecoin is backed by a pool of stablecoins and cryptocurrencies, which can be used to maintain its stability in times of market volatility.
  4. Float Protocol (FLOAT): Float Protocol is an algorithmic stablecoin that is designed to maintain a stable value of $1 by adjusting its supply based on market demand. It uses a decentralized price oracle to determine the value of its collateral, which is held in a pool of stablecoins and cryptocurrencies.
  5. Basis Cash (BAC): Basis Cash is an algorithmic stablecoin that is designed to maintain a stable value of $1 through a system of rebasing. Its supply expands or contracts based on market demand, with the goal of keeping the price stable.

These algorithmic stablecoins are typically used in decentralized finance (DeFi) applications, and offer users the ability to access stablecoins without relying on traditional banking systems or centralized authorities. However, they carry some risks related to the complexity of their algorithms and the potential for market volatility to impact their stability.

Are stablecoins regulated? 

The regulation of stablecoins varies by jurisdiction, as stablecoins are a relatively new and rapidly-evolving area of financial technology. In some countries, stablecoins may be regulated as securities, commodities, or money transmitters, while in others, there may be little or no regulatory oversight.

In the United States, stablecoins are subject to regulatory scrutiny by multiple agencies, including the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Financial Crimes Enforcement Network (FinCEN). The regulatory treatment of stablecoins in the US depends on their specific characteristics and use cases, and stablecoin issuers may be required to comply with various laws and regulations related to securities, commodities, money transmission, and anti-money laundering (AML) and know-your-customer (KYC) requirements.

In the European Union, stablecoins may be subject to regulation under the Payment Services Directive (PSD2) or the Markets in Financial Instruments Directive (MiFID II), depending on their specific characteristics and use cases. The European Securities and Markets Authority (ESMA) has also issued guidance on the regulation of stablecoins.

Are stablecoins’ values really stable?

Stablecoins are designed to maintain a stable value, typically pegged to a fiat currency such as the US dollar, so they are not subject to the same level of price volatility as other cryptocurrencies. However, there have been a few instances in which the value of stablecoins has experienced significant drops. Here are some examples:

  1. Tether (USDT): In 2018, the value of Tether, one of the most widely-used stablecoins, dropped briefly to $0.92 before rebounding. This occurred amidst concerns about the solvency of the company issuing Tether and its alleged ties to the cryptocurrency exchange Bitfinex.
  2. Dai (DAI): In March 2020, the value of DAI, an algorithmic stablecoin, briefly dropped to $0.88 amidst a broader market sell-off triggered by the COVID-19 pandemic.
  3. Iron Finance (IRON): In June 2021, the value of IRON, a relatively new algorithmic stablecoin, crashed from around $64 to less than $0.01 in a matter of hours. This occurred due to a combination of market manipulation, concerns about the project’s governance, and technical issues with the stability mechanism.
  4. FRAX (FRAX): In September 2021, the value of FRAX, an algorithmic stablecoin, briefly dropped below its $1 peg amidst a broader market sell-off triggered by concerns about China’s crackdown on cryptocurrencies.
  5. On May 7th, 2022, the price of the then-$18-billion algorithmic stablecoin terraUSD (UST), which is supposed to maintain a $1 peg, started to wobble and fell to 35 cents on May 9, 2022. 
  6. On Mar 10, 2023, Circle’s USDC instability causes domino effect on DAI, USDD stablecoins, DAI, a stablecoin issued by MakerDAO, lost 7.4% of its value due to USDC’s depegging. 

How can I cash out my stablecoins?

Withdraw from crypto exchange

Choose a reputable platform or exchange that supports the stablecoin you want to cash out. Some popular platforms that support stablecoins include Coinbase, Binance, and Kraken. Convert your stablecoins to fiat currency and Withdraw your funds

Buy Gift Cards with Stablecoins

Gift cards are an easy way to buy stuff with Stablecoins online or in-store. Piggy Cards gives stablecoin users a quick and safe way to buy gift cards with crypto. With 300+ gift cards to choose from, there is an endless amount of places where you can use Stablecoins and things you can buy with Stablecoins.

Popular gift cards you can buy with Stablecoins include:

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