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Dollar Value, Crypto Tech; How Stablecoins are Bridging Traditional Finance & Web3

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Daniel is an Entrepreneur & Crypto Advocate. He's been participating in Crypto since 2012 as a miner, investor, writer, & content creator.

TLDR;

Stablecoins are Digital Currency Tokens (aka Cryptocurrencies), whose value are inherently stable in nature by some mechanism which pegs the token reliably and consistently 1:1 in value relative to $1.00 USD.

Will Stablecoins be The Digital Dollar of the Future?

Stablecoins, the new Digital Dollar $

Stablecoins, the new Digital Dollar $

The Most Common Uses for Stablecoins Include:

Seizing Arbitrage Opportunities:

With highly volatile assets like crypto, traders can take advantage of price discrepancies between two exchanges by holding a stablecoin balance both, and quickly buying/selling inefficiently priced assets.

Move in/out of an investment with negligible fees & fewer taxable events:

Using stablecoins settlement occurs in milliseconds rather than business days, and the fees are fractions of a cent in most cases. Furthermore, multiple taxable events are spared thanks to removing the need for traditional bank gateways. Leaving their crypto and crypto gains all on-chain at all times.

Cross-Chain & Cross-Exchange Transfer:

Many stablecoins are chain agnostic, and are issued in smart contracts across many blockchains. Making the transfer of value between chains, dapps, and DAOs significantly easier and faster.

Why Would Anyone Need a Crypto Dollar?

For context, we need to reflect on the crypto space around 2017-2018, At that time Bitcoin is coming up on it's 10th Birthday, and just saw its ATH market price hit the 10's of thousands for the first time. There are thousands of cryptocurrency projects, all competing with the claim that they are the next Bitcoin and/or Ethereum killer. Crypto reaches a new level of notoriety, and new retail investors are clammering to put money in.

The problem; many investors for the most part had (and still have) no clue how crypto wallets work, and they don't want to know. They just want to make sick gains, bro. Meanwhile, the tech savvy bunch that do happen to make it in the market are burdened with huge fees and long settlement times trying to move in and out of those investments.

In comes Tether. The first popular stablecoin, Tether (USDT), gained steam in a big way by helping traders move in and out of crypto positions quickly. Traditional methods of transfer like ACH take time and require a lot of KYC forms to authorize the necessary accounts for transfer. Wires are prohibitively expensive to most, and also comparatively slow when you consider blockchain settlement happens often in minutes, sometimes seconds.

The frustration of losing several business days and large percentages of one’s profits to mainstream bank inefficiency had reached a head. The situation changed drastically for crypto and equity markets as a whole once stablecoins entered the scene. For perspective, in the last 5 years trillions of dollars of market capitalization have poured in to stablecoins, making 3 of the top 10 cryptocurrencies at time of writing cryptos that are pegged to the dollar.

Takeaway; The same attributes we have come to love and expect from top cryptos; quick settlement, permissionless access, decentralization, and some degree of anonymity, are accessible via stablecoins but with the added feature of general price stability.

Top 3 Stablecoins by Marketcap

Most Popular Stablecoins by Marketcap as of 5/5/22

Most Popular Stablecoins by Marketcap as of 5/5/22

Tether (USDT)

  • Most widely held stablecoin with a market cap of over $83 Billion Dollars.
  • First and arguably one of the most controversial Stablecoins. Issued in partnership with Bitfinex (although they would prefer you didn’t know that.)
  • Competitive advantage: First mover.
  • Drawback: Management has given cause for suspicion in the past, asset collateralization is vague and governance is centralized.
  • Issued for use on: Algorand, Bitcoin Cash’s Simple Ledger Protocol (SLP), Ethereum, EOS, Liquid Network, Omni, Tron and Solana

Circle’s USD Coin (USDC)

  • Second most popular stablecoin with a market cap of over $45 Billion Dollars
  • Launched September 2018 by Circle/Coinbase consortium Centre as a direct competitor to Tether.
  • Competitive advantage: transparency in auditing and reputation of its issuers.
  • Drawback: Centralization risk
  • Issued for use on: Ethereum ERC-20, Algorand ASA, Avalanche ERC-20, Flow FT, Hedera SDK, Solana SPL, Stellar asset, and TRON TRC-20
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TerraUSD (UST)

  • Third most popular, and current rising star in stablecoins with market cap over $18 Billion Dollars
  • Announced September 2021 by Do Kwon and Terraform Labs.
  • Competitive advantage; novel, algorithmic, and infinitely scalable allowing true cost minting.
  • Issued for use on: Ethereum, Binance Smart Chain, Harmony ONE, Osmosis, Secret, Injective, Cosmos, Avalanche, Fantom, Polygon, and Moonbeam

Notable Mentions:

Maker DAO’s (DAI)

  • Early stablecoin attempt launched by the Maker Decentralized Autonomous Organization (DAO) which aims to achieve stability through over-collateralization with crypto assets.
  • Governed entirely by Maker DAO Token (MKR) Holders, and issues by smart contract execution.

Tron's USDD

  • Newest stablecoin in the space, largely modeled after the mechanics of Terra's UST, but using Tron (TRX) as the collateral asset.
  • Highest current APY offered by any native stablecoin protocol (30%) due to high risk of unproven contracts.
  • Aim's to provide the utility of stablecoins with the efficiency and near-zero transaction costs associated with the Tron Network.

Paxos / Binance USD (BUSD)

  • Secured by Paxos, and largely distributed by the world’s largest and most reputable Cryptocurrency Exchange; Binance.com
  • 96% Fiat backed by reserves held in FDIC insured US banks with additional reserves held in US Treasury Bills.
  • 8/6/2020 BUSD was listed on NYDFS greenlist, meaning traditional finance is pre-approved to transact in this stablecoin.

Stablecoins are NOT risk-free.

Some compelling arguments waged against them are, but not limited to:

  • Unreliable short-term peg value during times of extreme volatility.
  • Centralization risk associated with having to trust any party who possesses overwhelming control of collateral and/or governance of the token.
  • Self-Custody risk, associated with losing access to, or improperly storing private keys, leaving one vulnerable to hackers/loss. Write your private keys down & Don’t download sketchy files or click sus links…

Stablecoins are NOT risk-free

The threat of bad actors, market manipulation, and protocol bugs/errors is always prevalent.

Where can I get Stablecoins?

Minting

Many stablecoins can be minted or released directly from the organization governing the mint. This is true for Tether, UST, but not USDC.

Centralized Exchanges

For stablecoins like USDC, we can easily buy tokens using a centralized exchange as our Fiat gateway like Kucoin, or Binance.

Decentralized Exchanges

In the event you were given or paid in cryptocurrency, and want to exchange it for stablecoins, you could use a decentralized exchange (DEX) to exchange your crypto to stablecoins. A DEX works much like a centralized exchange but without account signups and KYC.

The Promise of Stablecoins

With risk, comes the potential for reward. The world of Crypto and Stablcoins behaves no differently. Although the space is new and relatively untested, stablecoins offer new, exciting opportunities to traditional retail investors and crypto maximilists alike.

Innovation in stablecoin technology has allowed for every market participant to benefit from greater liquidity, faster on-boarding of institutional investment, and the rise/boom of Defi Lending & Yield Farming.

To help fuel this promise, there are hundreds of third-party companies working diligently to expand on existing payment platforms and gateways for bridging stablecoins to traditional Fiat.

It would be naive to think we won’t see more code vulnerabilities being exploited and bad actors trying to get away with stolen funds. But, with intelligent self-custody and careful investment in audited and proven smart contracts alone, we can feel relatively safe and incredibly hopeful for the future of finance thanks in large part to stablecoin tech.

Final Thoughts

The space is admittedly new and has its fair share of bugs to work out. As a community it’s near inevitable we will likely absorb the cost of network congestion on chain, code exploits, and bad actors.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

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