The volatility of crypto assets’ values has always been one of the roadblocks for their widespread adoption. To solve this issue, the first stablecoin was born — USD Tether. Soon after, as the reputation of USDT grew in scandals, many new alternatives started emerging in the market. In fact, there are more than 57 new arrivals, according to a recent report by Blockchain.
What exactly are stablecoins and how do they help?
The simplest way to put it is that a stablecoin’s value is pegged to a stable asset, such as US Dollars, Euros, gold, or other assets with stable values. They represent safe heaven for crypto investors’ portfolio holdings in the case of a market crash as we’ve witnessed in the past year. Not all stablecoins are the same, though.
There are various types of stablecoins, depending on what keeps their price stable. The report from Blockchain summarizes them in two main categories — asset-backed and algorithmic. As the name might suggest, the asset-backed stablecoins are mostly centralized and backed by fiat, cryptocurrencies, other stable assets, such as gold and silver. On the other side, algorithmic stablecoins, also known as seigniorage-style, are decentralized by nature and rely on no real-world collateral. Instead, the value of the coin is determined solely by its algorithm.
The fiat-backed stablecoins solve the volatility challenge by pegging one-to-one each coin with a certain amount of some stable asset. An example would be Tether, each USDT is backed by $1 or so they claim. Algorithm-backed cryptocurrencies seek to solve this problem by controlling their money supply through monetary policy. Basically, they rely on the software to adjust the available coin supply on the market, essentially ensure its price remains stable. One could argue that algorithmic stablecoins are technically digital central banks.
USDT: Clouded in mystery
Until recently, the predominant player in the game was USD Tether, initially known as “Realcoin.” As the coin and the company behind it have been in many scandals throughout their short lifespan, people began to ask questions and dig deeper into. After the most recent dispute at nearly $3 billion market cap, Tether’s total supply, and market dominance began to decline as a clear contrast to its competitors’ rising circulating supply. Right now, the market cap of USDT is about $1.8 billion.
Beyond USD Tether: A More Stable Future?
As the dominance of USDT declines, new players enter the game. According to data from The Block, the most used stablecoins after USDT are TrueUSD, USDC, PAX, followed by Gemini Dollar and Dai. While TrueUSD has been around for a while, other more recent coins, such as USDC, issued by Circle, and PAX have grown at a much faster rate.
Unlike Tether, some of these new market entries comply with certain regulations to ensure their safety. Some of the requirements that projects, who have acquired permission from the New York Financial Regulator to launch a stablecoin, such as PAX and Gemini Dollar, will include strict recordkeeping and monitoring as well as adopting “risk-based controls.” These requirements prevent money laundering and various other illicit activities.
Recently, Binance, one of the cryptocurrencies’ biggest exchanges announced they would be creating a new stablecoin market, essentially renaming their USDT section to USD? and adding new stablecoins as base pairs for trading. One of the platform’s newest entries is namely PAX.