We finally deal with the conclusions about which cryptocurrency is least exposed to the risks of sudden and sharp depreciation.
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All about stablecoins
Stablecoins differ from each other in the way their value is linked to the dollar:
- Traditional stablecoins with fiat reserves. There is always some legal entity here that must keep enough safe dollar reserves in the bank to exchange all issued coins for a real crisp dollar in case of emergency.
- Stablecoins with cryptocurrency reserves, such as DAI. Here, other cryptocurrencies act as collateral instead of off-chain reserves (existing in the real financial system). Since the dollar price of a crypt is usually very volatile, stablecoins of this type usually use overcollateral: for each issued token with a face value of $1, a collateral in a crypt with a current value of $1.5 and above is conditionally frozen.
- Algorithmic stablecoins like Terra (UST), in which a cunning mechanism for the automatic release / redemption of special tokens is responsible for the peg to the dollar, depending on the balance of supply and demand (we will analyze in more detail later).
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Tether (USDT)
It is important to understand that two points are critical for this kind of stables: the reliability of both the assets themselves, in which the reserves are located, and the manner in which they are kept, as well as the continuous operation of the legal company that holds reserves for the conversion of tokens into dollars and the other way around.
USD Coin (USDC)
USD Coin, or USDC, is a stablecoin issued by the U.S.-registered company Circle Internet Financial Ltd. At the same time, the management of the entire process of functioning and development of USDC is carried out by the (as if pseudo-independent) consortium Center, which was founded by Circle itself together with representatives of the Coinbase crypto exchange.
The attitude of the community towards USDC is something like a more decent brother Tether. Compared to USDT, who frequently engages in controversies, wears unkempt clothing, hangs out with questionable men, and smokes in the alley, USDC is a good boy with a stylish haircut, who diligently studies his lessons, strives, when he grows up, to get on the stock exchange with serious uncles in suits and in every way cynically tries to be good.
Binance USD (BUSD)
Another fiat-backed stablecoin is Binance USD (BUSD), which has the same name as the world’s largest crypto exchange. At the same time, these coins are not issued by Binance itself, but by the American company Paxos Trust Company, which in addition to this deals with several more tokens (HUSD, Pax Dollar/USDP and Pax Gold Token/PAXG).
Paxos also boasts everywhere that it is their stablecoins that are slightly less than fully approved by the New York Department of Financial Services – but what exactly this means is not clear enough.
DAI
DAI has a very interesting value maintenance mechanism, quite different from the previous three stablecoins.
For each DAI issued with a face value of $1 in special smart contracts, cryptocurrency collateral is frozen directly on the blockchain with the current market value much higher. More than half of the collateral is now USDC, which we already know, about a quarter – Ethereum and Bitcoin, and the rest is trifles.
If the value of the crypto in the collateral goes down sharply and there is a risk that it will no longer be enough to cover the $1 DAI face value, then in this case, smart contracts allow you to quickly sell the collateral.
To conclude, there is no single best stablecoin from all sides. Each has its own downsides or risks. So, which stablecoin suits you best depends primarily on your goals.