Introduction to stablecoins
A stablecoin is a cryptocurrency that is linked to a “stable” reserve asset such as the U.S. dollar but unlike other cryptocurrencies they are designed to provide stability within the crypto ecosystem. For example, a dollar-pegged stablecoin (like USDT & USDC) is redeemable 1:1 for the U.S. dollar, at any given time.
Stablecoins offer the same utility that other cryptocurrencies like Bitcoin or Ethereum do. They offer instant and permissionless processing and 24/7 * 365 accessibility but unlike Bitcoin or Ethereum they also offer peace of mind to traders due to their lack of volatility in price.
Because of their lack of volatility, stablecoins are primarily used as a means of payment or to facilitate trade. They currently serve as the bridge that connects the traditional financial system to crypto and in many ways are the backbone of the crypto economy.
Stablecoins provide a frictionless way for capital to flow in and out of different crypto markets without having to exit the ecosystem altogether. They provide an opportunity for investors to cash out of markets like Bitcoin without having to completely cash out of crypto and into fiat currencies (government backed currencies like USD, GBP, etc.) – avoiding all the hassles and fees that are tied into that process.
They also provide a seamless way for investors and traders alike to re-enter these crypto markets at any time. Just like other crypto currencies, stablecoins are permissionless and accessible 24 hours a day, 7 days a week, 52 weeks a year. This allows you as a stablecoin holder to enter the market when and as you please. This is a big improvement compared to having to onboard using fiat which typically suffers from time delays & high fees. Not only does fiat onboarding cost users anywhere from 1-5% but the time delay might also mean that you miss out on the buying opportunity you were hoping for as you wait for your bank to process your funds.
The growth of Stablecoins
Tether, otherwise known as USDT, was the first stablecoin which entered the markets and made any sort of significant impact. To this day USDT is by far the biggest and most used stablecoin in the world by both market cap and daily traded volume.
Founded in 2014, Tether has grown to become the 4th biggest cryptocurrency in the world, valued at the time of writing (Nov 2021) at $73 Billion USD. Although it has dominated the market since inception there are now a multitude of other stablecoins that exist in the space, all of which are trying to compete with USDT for that top spot.
Inspired by the success of USDT and all the value it created for the ecosystem, many other big players in crypto have come out with their own stablecoins. Coinbase & Circle created USDC, the second largest stablecoin in the world, in 2018, currently valued at $36 Billion USD. Gemini, founded by the famous Winklevoss twins, created GUSD (Gemini USD) a month after USDC’s launch; they are currently valued at a relatively small $151 Million USD. Towards the end of 2019 the world’s largest crypto exchange, Binance, launched their stablecoin, Binance USD (BUSD). BUSD is currently the third largest stablecoin in the market with a market cap of $13 Billion.
Seven years on and the stablecoin market is not showing any signs of slowing down. The market is now valued at over $146 Billion dollars and stablecoins are helping facilitate roughly $80 Billion dollars a day in trading volume across the board.
This growth really shows that stablecoins not only allow more capital to enter the crypto economy but more importantly allows capital to stay in the space.
Different types of stablecoins
There are three different types of stablecoin out there that all work to do the same thing – provide stability in the crypto economy. The ways they do that however do vary.
- Fiat-collateralized stablecoins
- Crypto-collateralized stablecoins
- Algorithmic ‘Algo’ stablecoins
Fiat-collateralized stablecoins such as USDT and USDC are the most popular stablecoin and are both pegged to, and collateralized by, the US Dollar.
These are generally the simplest and purest form of stablecoin. Taking Tether (USDT) as an example: for every USDT issued, the Tether Foundation will keep $1 USD in reserve. This keeps the price at roughly $1 USD as each unit of USDT can be redeemed at any time for $1 USD from their reserves. When redeemed, the USDT will be taken out of circulation and the holder will be given back the USD that was used as collateral for those tokens to be issued.
Crypto-collateralized stablecoins are similar to fiat-collateralized stablecoins except crypto assets are being used instead of USD (or other fiat currencies) as the underlying collateral.
One example of a crypto-collateralized stablecoin is Dai. Dai is pegged to the USD (meaning 1 Dai is aiming to be worth $1 USD) but is backed by ETH rather than USD.
Theoretically, crypto-collateralized stablecoins are “safer” than fiat-backed as they rely on a smart contract to handle the exchange and redemption process. This uses blockchain to create a trustless system and thus removes the need to place trust into a person or company (like Tether).
Algorithmic stablecoins or “algo” stablecoins, work by manipulating the supply of the stablecoin on a smart contract to maintain their peg to the US Dollar.
Algo stablecoins work by focusing on the simple economic principle of supply and demand and the algorithm ‘Price = Supply / Demand’. Algo stablecoins rely on this core principle and realise that they can control one side of this equation easily – the supply. So all they have to do is figure out the demand and adjust the supply accordingly to ensure the price stays at $1.
The logic states that if the trading price of an algo stablecoin increases from $1 to $1.1 then the smart contract can increase the total supply of the stablecoin. Assuming the demand stays the same, the price will decrease as the supply increases, according to the ‘Price = Supply / Demand’ equation.
Similarly if the trading price decreases from $1 to $0.9 then the algorithm will decrease the supply, this should have the opposite effect and should increase the price.
flexUSD – the world’s first interest-earning stablecoin
With flexUSD we created a whole new category of stablecoin: the interest earning stablecoin.
flexUSD is the first stablecoin that pays interest on-chain, meaning that everyone who owns flexUSD will get paid interest directly into their wallet of choice, wherever flexUSD is stored on the blockchain. This means you can even hold it in cold storage and still earn the interest every 8 hours.
flexUSD is a crypto-collateralized stablecoin that is fully backed by and redeemable to USDC. This means for every 1 flexUSD out there there is 1 USDC in our reserves.
flexUSD was created in 2020 and currently has a market cap of $330 million USD at the time of writing. To date it has paid over $10 Million USD to its holders in interest and has a lifetime average interest rate of 10.3% APY.
flexUSD works like every other stablecoin, it can be used to buy and sell crypto, it can be used as collateral to trade futures on CoinFLEX and it can be redeemed at any time, 1:1, for USDC.
The difference between flexUSD and every other stablecoin is that flexUSD pays you interest whilst you do all of the above. Every 8 hours you hold or trade with it you are earning interest, which is automatically deposited into your wallet.
To top it off flexUSD will never pay a negative interest rate, meaning that even on its worst days you earn the same as holding USDC elsewhere — zero. On a good day, flexUSD can pay over 20% APY. You can view the historical interest rates of flexUSD here.
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All content expressed is purely for educational purposes only. This is not financial advice. Do your own research before investing or trading.
Author: Adam Diaz