Safe Stablecoins
Let's go through the following points:
• What's stablecoin?
• About types of stables
• The best fiat stables
• The best cryptocurrency stables
• The best algorithmic stablecoins
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Stablecoins are cryptocurrencies whose price is tied to and backed by a specific reserve or group of assets. These reserves can be, for example, fiat currencies, gold or other valuable objects.
The value of some cryptocurrencies can fluctuate wildly due to huge inflows and outflows of funds, so if you want to use your crypto as a means of storage or exchange, then it is better to look not to altcoins or even BTC/ETH, but to stables.
With stablecoins, you can preserve the value of your assets because they are designed to keep value pegged to the dollar.
In addition to being a means of exchange, cryptans also use stablecoins to participate in DeFi projects that involve lending or staking stablecoins. This provides investors with low-risk passive income as they provide additional liquidity on the platform.
About types of stablecoins
Fiat stablecoins, as the name suggests, are pegged to fiat currency. Fiat currency is essentially not backed by physical assets and is issued by the state. These types of stablecoins usually have a reserve equal to the fiat currency they are pegged to.
A popular example is the USD Coin (USDC), which is heavily backed by US dollars. However, as everyone has already managed to make sure, the security of a cryptocurrency is not always evaluated by its attachment to fiat currency, because banks also tend to go bankrupt or close, and then those fiat funds to which the crypto was attached will be in question of existence. The USDC lost its peg to its exchange rate precisely because of this situation with the bank where the funds to support it were kept.
Despite the relatively recent UST fail, there are still investors who accumulate their assets in stables built on the basis of stabilization algorithms (algorithmic). Popular examples now include DAI or FRAX.
Algorithmic stablecoins that do not have collateral - do not have fiat or valuable objects on which their course would be based. These decentralized coins are designed to help increase market price stability without involving centralization (a governing body).
Algorithms include special stabilization measures, which are actually prescribed in the smart contracts themselves. There are specialized oracle contracts that are used to help these algorithmic smart contracts function. These contracts help to obtain information about the prices of algorithmic stablecoins on other exchanges.
After that, it is necessary to determine whether to increase or decrease the supply (circulation). The contract then analyzes the number of tokens to mint or burn from user wallets based on the collected information.
Some stablecoin teams have gone even further to make their algorithmic stablecoins partially backed by fiat or other valuables. For example, FRAX is partially supported by stablecoins USDC and FXS, the managing token of the Frax protocol, so it is worth keeping such nuances in mind when choosing where to invest, because after the delinking of the USDC rate from the dollar rate, the FRAX rate was also in question.
With binding to cryptocurrency
This type of stable relies on other cryptocurrencies to support its rate. By relying on another cryptocurrency as collateral, one would naturally fear that a cryptocurrency-backed stablecoin would be volatile. So for investors to worry less, such stablecoins are usually over-collateralized to make sure they retain their value during periods of significant price volatility.
The best fiat stables
Tether (USDT)
Originally known as Realcoin, the Tether stablecoin was officially launched in 2014 and was one of the very first stablecoins. It is backed by many assets that include traditional currencies and cash equivalents, ranging from bonds to commercial paper.
At the beginning of 2023, the 24-hour trading volume ranged from 18 to 50 billion USD, making it one of the best stablecoins by trading volume.
Some of the best farming and staking sites can earn from 10% to 12.5% per annum for USDT loans. Later in 2023, Tether plans to release a full audit to satisfy interested potential investors.
TrueUSD (TUSD)
TrueUSD was founded in 2018 and gained attention due to its reputation as the first audited and reserve-proven stablecoin on the network. To ensure that each TUSD token is fully 1:1 backed by the US dollar, accounting firm Cohen & Company conducts regular monthly audits to ensure 100% TUSD is backed.
This makes it a reliable centralized stablecoin to invest in if you are interested in, for example, staking stablecoins over a long period of time.
USDC Coin (USDC)
USD Coin was created by the Circle organization, which consists of several famous people in the world of cryptocurrencies. The coin was launched in 2018 and became one of the best because it offered an alternative to USDT. While Tether's assets remained a secret at the time, USDC provided evidence of its backing with USD-equivalent assets.
It's worth noting that the recent Silvergate and Silicon Valley Bank debacle caused the USDC stablecoin to lose its dollar value and drop below $1. This is causing concern among cryptocurrency advocates as more and more exchanges stop or suspend USDC trading.
Binance USD (BUSD)
BUSD is a joint project between Binance and Paxos that is fully backed by USD. These funds are also held in US bank accounts owned by Paxos. Since Paxos announced that they will no longer mint new BUSD, Binance has replaced them with TUSD + USDT in their SAFU pool.
There were still some liquidity issues around BUSD in the past which led to the suspension of BUSD trading on Coinbase and it was eventually removed from that crypto exchange.
The best cryptocurrency stablecoins
DAI
The Maker Foundation created the DAI stablecoin in 2017. Management of DAI has now been transferred to MakerDAO. DAI is over-collateralized using Collateralized Debt Position (CDP) smart contracts. These Maker Protocol smart contracts allow users to lock (lock) their collateral assets, such as ETH, in exchange for DAI.
For crypto investors, DAI immediately stands out because it is backed by crypto assets rather than fiat dollars. If there is a sudden change in the value of DAI, investors will be able to easily convert their DAI tokens into coins like ETH or WBTC thanks to the active CDP smart contracts. Even after ETH dropped below $2,000 in the past few months, DAI managed to stay pegged due to its diversified reserves and excessive collateral. This makes it one of the best stablecoins on the market, as DAI has demonstrated its ability to withstand massive disruptions.
Reserve Rights (RSV)
Reserve Rights was developed and launched in 2019 by an organization called the Reserve Project. As one of the best crypto-backed stablecoins, RSV uses contract-driven pools of cryptocurrencies to maintain its peg. As part of its future plans to become one of the biggest and best stablecoins, the Reserve Rights team plans to eventually use more than 100 low-volatility assets to offer greater stability to investors. It is this focus on transparency, decentralization and multi-asset security that makes RSV attractive to investors.
The best algorithmic stablecoins
USDD
After the UST crash, Justin Sun created this coin that replicates the same algorithm, avoiding mechanisms that could contribute to a repeat of the UST situation. The coin was launched on the TRON blockchain and is pegged 1:1 to the US dollar.
However, many critics still do not trust Justin Sun enough to invest in his project again.
FEI USD (FEI)
The Fei protocol uses the Controlled Value (PCV) protocol instead of the Total Lock (TVL) model. With PCV, the Fei protocol permanently stores funds deposited by users. This gives the protocol full rights to mint and burn FEI to maintain the peg to the dollar. To reduce pegging concerns, the protocol reweights FEI every 4 hours, with a minimum price difference below the fixed point of 0.5%.
FRAX
The coin maintains its peg using two reserves: the fiat-backed USDC and FXS, a native token of the Frax ecosystem.
Interestingly, the Frax protocol owns about 20% of the available CVX tokens. This allows his team to direct Curve Finance's liquidity into its own pool of DAI, USDT, USDC and FRAX stablecoins. By teaming up with such projects, FRAX manages to enhance its reputation as a stablecoin that is able to protect its peg during periods of high volatility.