facebookUltimate Guide to Stablecoins (Cryptocurrency): USDT vs USDC vs BUSD vs DAI

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Ultimate Guide to Stablecoins (Cryptocurrency): USDT vs USDC vs BUSD vs DAI

profileJoel Koh

As an asset class, cryptocurrencies (crypto) are known for being infamously volatile, save for exceptions like stablecoins: a category of cryptocurrencies that try and peg their market value to an external asset.

Source: The Block

Stablecoins have been catching on recently.

At the time of writing the total supply of stablecoins is worth about US$102.6 billion (~S$135.8 billion); more than tripling in value as the total supply was only worth about US$29 billion (S$38.4 billion) at the start of the year.

Their growing popularity can be attributed to their functionality, as they offer both the speedy processing, security and increased privacy that comes with cryptocurrencies, and the price stability of fiat currencies.

Also, this growth suggests that more people are pumping money into cryptocurrencies into the domains of decentralised finance (DeFi) and trading cryptocurrency derivatives. This is because DeFi users use stablecoins to yield interest and trade while cryptocurrency derivatives traders use stablecoins as collateral.

Another use case of stablecoins is that it allows people to trade faster without having to rely on slow fiat transfers. Not to mention that some cryptocurrency exchanges only allow you to trade cryptocurrencies using stablecoins and other cryptocurrencies.

Looking to get into stablecoins? Here is all you need to know!

Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before investing in any investment product. The writer may have a vested interest in the investments products mentioned. 


TL;DR: Ultimate Guide to Stablecoins

StablecoinAverage APY From LendingMarket CapCirculating Supply
Tether (USDT)9.70%US$61.8 billion61.74 billion USDT
USD Coin (USDC)9.50%US$22.2 billion22.22 billion USDC
Binance USD (BUSD)8.70%US$8.7 billion8.68 billion BUSD
DAI (Maker)8.40%US$4.7 billion4.7 billion DAI

What Are Stablecoins?

Well, I am glad you asked.

As an asset class, cryptocurrencies (crypto) are known for being infamously volatile when priced against fiat currencies.

However, this volatility makes them highly risky and speculative investments that are not useful for payments as the cryptocurrencies price could go up or down significantly after the transaction goes through.

But not all cryptocurrencies have this problem.

Enter stablecoins: a category of cryptocurrencies that try and peg their market value to an external asset like fiat currencies, precious metals or other cryptocurrencies in a bid to stabilise the price.

FYI: Fiat currencies are the Government-backed currencies (e.g. Singapore dollar) that we use on a daily basis. 

Source: MAS

Typically, the organisations behind the stablecoin will have to ‘back’ up the supply of stablecoins with a securely stored reserve of real-world assets like fiat currencies or precious metals.

The real-world assets function as collateral for each stablecoin. In other words, each stablecoin is backed by a real-world asset.

In theory, stablecoin owners can exchange one unit of a stablecoin for one unit of the asset that backs it.

Thus, this makes the stablecoins stable and reduces price volatility as their value is pegged to a more stable asset.

Types of Stablecoins

Speaking of stability, there are actually different types of stablecoins that differ based on the underlying asset.

Source: Giphy

Here are the four major types of stablecoins.

Fiat Backed Stablecoins

The first and most popular category of stablecoins are stablecoins backed by fiat currencies like the US dollar in a 1:1 ratio (e.g. 1 stablecoin token = 1 USD).

These organisations behind the stablecoins are required to keep a secure reserve of the specific cryptocurrency as collateral for the stablecoins.

Also, this reserve is generally managed by an independent custodian that is audited on a regular basis to ensure compliance.

Examples of this type of cryptocurrencies include Tether (USDT), USD Coin (USDC) and Binance USD (BUSD).

Precious Metals Backed Stablecoins

Also, there are also stablecoins backed by precious metals like gold, platinum and silver.

An example of these types of stablecoins are gold-backed cryptocurrencies that link a stablecoin token to a fixed quantity of gold. For example, 1 gram of gold = 1 stablecoin token.

Like the fiat-backed stablecoins, the organisations behind the precious metal-backed stable coins will have to hold the precious metal in a secure reserve managed by an independent custodian that is audited on a regular basis for compliance.

Examples of gold-backed cryptocurrencies include:

  • Paxos Gold (PAXG);
  • Perth Mint Gold Token (PMGT);
  • Digix Global (DGX);
  • Tether Gold (XAUT);
  • Meld Gold by Algorand.‍

Cryptocurrency Backed Stablecoins

In addition, there are stablecoins backed by other cryptocurrencies as well.

You might be thinking, won’t that be a problem as other cryptocurrencies are very volatile?

To tackle this issue, cryptocurrency backed stablecoins maintain an over collateralised position for their reserves.

Put simply, cryptocurrency backed stablecoins have a lower supply and larger reserve of cryptocurrency in comparison to fiat-backed cryptocurrencies.

For example, a cryptocurrency backed stablecoin might issue stablecoins in a 1:3 ratio where $100 worth of stable coins will be backed by $300 worth of cryptocurrency reserves.

Examples of cryptocurrency backed stablecoin projects include Maker.

Maker uses collateralised debt positions (CDPs) that lock up a user’s cryptocurrency as collateral governed by a smart contract. Once the conditions are filled and the collateral is secured, the smart contract automatically creates new DAI stablecoins.

Algorithmic Stablecoins

Last but not least we have algorithmic stablecoins. Unlike the stablecoins mentioned above, these algorithmic stablecoins are not backed by any collateral.

Instead, the price of these stablecoins are managed by an algorithm that controls the supply of these stablecoins.

Here is how this works.

Let’s say the stablecoin’s price deviates from the target price of $1 to $1.20. The algorithm will then automatically add more to the supply of the stablecoins and drive the stablecoin’s price down.

This works in reverse too.

However, this type of stablecoin has not caught on. Basis stablecoin which was the most popular algorithm stablecoin was actually shut down in 2018 because of regulatory concerns.

Advantages of Stablecoins

Now that you know a little more about stablecoins, here are some of their advantages and disadvantages.

Easily Transferable Across Borders

As stablecoins are cryptocurrencies, they can be easily transferred across international borders.

This is especially useful for countries like Venezuela where economic conditions are unstable. For example, the Venezuelan Government is working with Circle, the organisation behind USD coin (USDC) to deliver aid to front-line medical workers fighting the COVID-19 pandemic.

Speedy Transactions And No Intermediaries Required

Generally, financial transactions on the blockchain are processed much faster than traditional transfer methods.

Also, as these stablecoin transactions do not require an intermediary, there are no third-party fees. But, on balance, do note that you will have to pay fees to use the Blockchain network.

Transparent

Compared to fiat currency transactions, stablecoin transactions are a lot more transparent as they are recorded on a public ledger (the blockchain) that can be scrutinised by everyone.

Disadvantages of Stablecoins

There are also some disadvantages to stablecoins.

Lack of Transparency With Reserves

Arguably, the most important component to stablecoins is their reserves.

However, some stablecoin issuers are less than transparent about where the collateral is being held.

This can be problematic as, without this knowledge, it is hard to properly evaluate the risks you are undertaking when investing in the stablecoin.

For example, you could be investing in stablecoins from a stablecoin issuer that does not have a license to manage in the country where the reserves are held.

This could mean that the Government could possibly freeze the stablecoin’s reserves temporarily or permenantly.

This has happened before. In October of last year, Bitcoin exchange OKEx temporarily suspended withdrawals after their founder Xu Mingxing was allegedly arrested by Chinese police.

And since you have no legal right to the fiat collateral reserves stored at these exchanges, there is little you can do.

Not to mention the possibility that stablecoin might not have enough in its reserves to redeem every unit which will affect faith in the Stablecoin.

Centralisation

Another issue with stablecoins is that they are actually issued by centralised entities that own the currency in the reserves.

This centralisation goes against the general ethos of blockchain technology which is supposed to be decentralised.

Unfortunately, this centralisation can be problematic.

Let’s say you were holding onto USDT. If Tether the company behind it collapses, the value of your stablecoins might crash and you might lose your capital.

To mitigate this risk, you should diversify your portfolio of stablecoins and protect against any individual company collasping.

Pegged to the Asset

The last issue I would like to discuss is that stablecoins might not be as stable as you think.

This is because the stability of the stablecoin is still tied to the asset that the stablecoin is pegged to.

Take fiat currencies for example, you are still at the whim of the central governing bodies behind them who might print more currency and devalue your stablecoin.

Basically, any fluctuations in the value of the asset that your stablecoin is pegged to will be reflected in the stablecoin.

How to Earn Money With Stablecoins

So you might be thinking, how can you earn money with stablecoins since the price of the stablecoin will not appreciate much?

Well, there is a way to do so.

If you are already familiar with how peer-to-peer (P2P) lending works – you should be able to understand how you can earn interest with stablecoins.

You can actually loan out your stablecoins on third party cryptocurrency P2P lending platforms like BlockFi, Celsius and Singapore based Hodlnaut.

In return for lending out your coins, you will be rewarded with a rate of interest that in many cases is significantly higher than what you can get through a traditional savings account.

Typically, these cryptocurrency lending platforms charge the borrowers a higher rate than what you receive in interest (called the spread) – this is how the platform is able to reward you with interest.

StablecoinAverage (APY)BlockFi (APY)Celsius Network (APY)Nexo (APY)Hodlnaut (APY)
USDT9.70%9.30%8.88%10%10.50%
USDC9.50%8.60%8.88%10%10.50%
BUSD8.70%8.60%8.88%--
DAI8.40%-4.60%10%10.50%

Do note that the percentages for this table refers to annual percentage yield (APY) and the interest is given out in kind. This means that the interest is paid out in the same token that you have deposited.

FYI: According to Investopedia: APY refers to the real rate of return earned on an investment product as it takes into account the effect of compound interest.

Also, please do your own due diligence on these cryptocurrency loan platforms before committing any money as there are certainly risks involved.

Popular Stablecoins

In addition, here are the top four stablecoins by market capitalisation according to CoinMarketCap.

1. Tether (USDT)

Tether is a fiat-collateralised stablecoin that is backed by the US dollar.

Each Tether token is pegged to the underlying fiat currency backing it with a 1:1 ratio. In theory, this means that Tether is backed 100% by actual assets in the Tether platform’s reserve account.

As each Tether is pegged to the US dollar, it is not as volatile as other cryptocurrencies.

The coin allows businesses like exchanges, financial institutions and payment companies to use fiat-backed tokens on blockchain networks.

Tether Controversy

Previously, Tether had claimed that its stablecoin was 100% backed by US currency.

But, it was accused of using over $800 million of its funds to cover up a major Bitfinex Loss back in 2019 and was investigated by the New York Attorney General (NYAG).

In February 2021, Bitfinex was ordered to pay US$18.5 million (S$24.5 million) settlement for the case. The NYAG also mandated Tether to submit reserves reports to the world each quarter for the next two years.

Source: Tether

In the latest report, Tether claims to have 75.85 per cent of its reserves in cash and cash equivalents, short term deposits and commercial paper.

In an interview with the Financial Times, financial commentator Frances Coppola stated that:

Tether’s reserves analysis published today confirms what many people have said for a long time, namely that Tether has almost no cash dollars on its balance sheet. Actual “cash” is 3.87% of what Tether describes as “cash and cash equivalents, which in turn make up only 75% of its total assets. We know from the March attestation that nearly all of Tether’s liabilities consist of tokens it has issued. And we now know there are hardly any real dollars backing these tokens. We have come a long way since Tether claimed on its website that all USDT in existence were 100% backed by real US dollars.

Market Capitalisation: US$61.8 billion

Volume (How Much Traded in 24 hours): US$92.0 billion

Circulating Supply: 61.74 billion USDT

Current Price (As of 30 May 2021): US$1

2. USD Coin (USDC)

USD Coin (USDC) is a stablecoin pegged to the US dollar in a 1:1 ratio.

The coin was started by cryptocurrency exchange Coinbase (NASDAQ: COIN) and Circle, a peer-to-peer payments technology company back in September 2018.

These companies came together to create The Centre consortium which is behind this stablecoin.

Every unit of this cryptocurrency in circulation is backed up by US$1 that is held in reserve, in a mix of cash and short-term U.S. Treasury bonds.

Every month, the US dollar reserves for USDC are audited by top five accounting services firm, Grant Thornton LLP. The report is then published and can be viewed on the Circle website.

Ultimately, the goal is to create an ecosystem where USDC is accepted by as many wallets, exchanges, service providers and dApps as possible.

Market Capitalisation: US$22.2 billion

Volume (How Much Traded in 24 hours): US$2.3 billion

Circulating Supply: 22.22 billion USDC

Current Price (As of 30 May 2021): US$0.9998

3. Binance USD (BUSD)

Binance USD (BUSD) is a 1:1 ratio USD stablecoin that was launched on 5 Sep 2019 by the world’s biggest cryptocurrency exchange Binance and Paxos, a New York-based Fintech company that focuses on blockchain technology and digital assets.

The coin was also approved and regulated by the New York State Department of Financial Services (NYDFS).

In addition, Binance publishes the BUSD monthly audit report on BUSD’s official website.

The coin itself is an ERC-20 token on the Ethereum blockchain and supports the BEP-2 token standard on token standard on Binance Chain.

Market Capitalisation: US$8.7 billion

Volume (How Much Traded in 24 hours): US$5.5 billion

Circulating Supply: 8.68 billion BUSD

Current Price (As of 30 May 2021): US$0.9997

4. Dai (DAI)

Last but not least we have DAI, an ERC-20 token on the Ethereum blockchain issued and maintained by the MakerDAO decentralized autonomous organization and the Maker Protocol.

Unlike the other stablecoins, DAI is actually backed by a mix of cryptocurrency assets.

Maker uses collateralised debt positions (CDPs) that lock up a user’s cryptocurrency as collateral governed by a smart contract. Once the conditions are filled and the collateral is secured, the smart contract automatically creates new DAI stablecoins.

The price of DAI is soft-pegged to the USD and is managed by MakerDAO’s algorithms. If all goes well and the system works as intended one DAI will be worth one USD.

Also, you need to know the differences between SAI and DAI:

  • Single-Collateral DAI (SAI) can only be collateralised with ETH.
  • Multi-Collateral DAI can be collateralised with multiple cryptocurrency assets.

Also, do note that SAI cannot be used with the DAI Savings Rate where DAI HODLers can lock their DAI holdings into MakerDAO’s Oasis app to earn interest.

Market Capitalisation: US$4.7 billion

Volume (How Much Traded in 24 hours): US$432 million

Circulating Supply: 4.7 billion DAI

Current Price (As of 30 May 2021): US$1


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About Joel Koh
History student turned writer at Seedly. Before you ask, not a teacher. My time as a history student has equipped me with the skills to evaluate the impact societal development has on financial and nonfinancial events.
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