facebookUltimate Guide to Stablecoins: USDT vs USDC vs BUSD vs UST vs DAI vs XSGD
154
shares

Advertisement

Ultimate Guide to Stablecoins: USDT vs USDC vs BUSD vs UST vs DAI vs XSGD

profileJoel Koh

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

Stablecoins have been catching fire recently.

At the start of the year, the total supply of stablecoins was only worth about US$29 billion (S$38.4 billion).

Fast forward to today (21 September 2021), the total supply of stablecoins has more than tripled in value as it is now worth about US$124.52 billion (S$168.17 billion).

The growing popularity of stablecoins 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. Seedly does not recommend that any cryptocurrency should be bought, sold, or held by you.​ Readers should always do their own due diligence and consider their financial goals before investing in any investment product and consult your financial advisor before making any investment decisions.


TL;DR: Ultimate Guide to Stablecoins

Type of HoldingBUSDUSDCUSDTDAIUSTXSGD
Cash & Cash Equivalents96%61%*2.93%150% Crypto Assets

(Over collaterised cryptocurrency asset backed stablecoin)
0%

(Stablecoin that uses a algorithm-based supply-demand elasticity mechanism to manage the peg)
100% Cash

(SGD stored in Xfers' reserve that is held in segregated accounts with CIMB, a fully regulated MAS-approved bank)
US Treasuries4%12%2.22%
Commercial Paper-9%*49.59%
Corporate Bonds5%9.96%**
Fiduciary Deposits-18.35%
Municipal Bonds & US Agencies0.20%-
Other Investments (Including Digital Tokens)-1.64%
Reverse Repo Notes2.73%
Secured Loans12.55%
Yankee Certificate of Deposit (CD)13%-

Table adapted from Tether’s report, USDC’s report and Binance’s report. Tether’s report has not been reviewed by independent auditors.

*USDC classifies commercial tickets that are expired within 90 days are classified as cash equivalents. Whereas commercial tickets that expire more than 90 days are classified as commercial papers.

**Includes funds and precious metals.


Can’t Get Enough of Stablecoins?

Tune in tonight to our latest Crypto 101 Essentials: Stablecoin and CBDCs SeedlyTV episode where our founder Kenneth Lou and guests Aymeric Salley, Co-Creator and Head of StraitsX (Xfers) and Dr Amrit Kumar, President of Zilliqa Research will discuss all things stablecoins.

During the show they will cover:

  • What are Stablecoins?
  • Do we really need Stablecoins in the world today?
  • What are some real-world use cases of CBDCs?
  • Moving beyond Stablecoins into the future of money
We will also be conducting a LIVE demo during the show to transact some XSGD over the ZIL blockchain to show you a potential glimpse of the future of cross-border remittance.

Disclaimer: This SeedlyTV is brought to you by Xfers.

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 cryptocurrency include Tether (USDT), USD Coin (USDC), Binance USD (BUSD) and TerraUSD (UST).

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.

To put it 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 is 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.

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 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 permanently.

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 collapsing.

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 governments 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
(Rounded Up)
Anchor ProtocolBlockFiCelsius NetworkNexoHodlnaut
BUSD8.20%-Up to 7.50%
(first 50k)
8.88%--
DAI7.60%-Up to 7.50%
(first 50k)
4.60%10%Up to 8.32%
USDC9.80%-Up to 7.50%
(first 50k)
8.88%10%Up to 12.73%
USDT9.80%-Up to 7.50%
(first 50k)
8.88%10%Up to 12.73%
UST19.47%19.47%----

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 surely risks involved.

Popular Stablecoins

In addition, here is a brief overview of the top five stablecoins by market capitalisation according to CoinMarketCap. We have also added XSGD as the stablecoin is quite relevant to our readers who are based in Singapore.

Also, it is important that you know what is behind each stablecoin as it will help you figure out which of these stablecoins you can trust.:

Type of HoldingBUSDUSDCUSDTDAIUSTXSGD
Cash & Cash Equivalents96%61%*2.93%150% Crypto Assets

(Over collaterised cryptocurrency asset backed stablecoin)
0%

(Stablecoin that uses a algorithm-based supply-demand elasticity mechanism to manage the peg)
100% Cash

(SGD stored in Xfers' reserve that is held in segregated accounts with CIMB, a fully regulated MAS-approved bank)
US Treasuries4%12%2.22%
Commercial Paper-9%*49.59%
Corporate Bonds5%9.96%**
Fiduciary Deposits-18.35%
Municipal Bonds & US Agencies0.20%-
Other Investments (Including Digital Tokens)-1.64%
Reverse Repo Notes2.73%
Secured Loans12.55%
Yankee Certificate of Deposit (CD)13%-

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 a 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.

According to Tether’s claims, only 5.15 per cent of its assets are in cash or cash equivalents (2.93% cash + 2.22% treasury bills).

For more on Tether, do read our coverage and analysis of this stablecoin.

Market Capitalisation: US$68.75 billion

Volume (How Much Traded in 24 hours): US$101.03 billion

Circulating Supply: 68.74 Billion USDT

Current Price (As of 21 Sep 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 month, the US dollar reserves for USDC are audited by the 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$29.43 billion

Volume (How Much Traded in 24 hours): US$5.47 billion

Circulating Supply: 29.42 billion USDC (there is no cap on the supply)

Current Price (As of 22 Aug 2021): US$1

3. Binance USD (BUSD) or Pax

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 New York-based blockchain technology and digital assets company Paxos. 

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$12.86 billion

Volume (How Much Traded in 24 hours): US$7.90 billion

Circulating Supply: 12.85 billion BUSD (there is no cap on the supply)

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

4. Dai (DAI)

Next up we have DAI, a cryptocurrency backed stablecoin managed by an algorithm.

More specifically, DAI is a decentralised ERC-20 token on the Ethereum blockchain that is issued and maintained by the Maker decentralized autonomous organization (DAO) and the Maker Protocol.

The price of DAI is soft-pegged to the USD and is created through an over collateralised loan and repayment process managed by MakerDAO’s decentralised application (dApps).

FYI: dAppps are essentially smart contracts on the Ethereum blockchain paired with a frontend user interface.

Dai is created when users make loans by putting up Ether (ETH) or other cryptocurrencies as collateral with a 150% collateralisation ratio.

This means that when you put up US$150 worth of ETH or other cryptocurrencies as collateral, you can borrow up to 100 DAI (worth about US$100).

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. DAI is technically an upgrade of SAI.

But as you know cryptocurrencies are pretty volatile.

In the event that the value of your collateral drops below the 150% collateralisation ratio, MakerDAO’s smart contracts will automatically liquidate the loans. But, if the value of your collateral increases, you can borrow more DAI.

Also, when users repay the loans and the accused interest in DAI, this DAI is automatically burned and users can now take out the collateral they have deposited.

As such, you can say that DAI’s US dollar value is essentially backed by the deposited collateral’s value held in the smart contracts.

If all goes well and the system works as intended one DAI will be worth one USD.

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$6.58 billion

Volume (How Much Traded in 24 hours): US$623.17 million

Circulating Supply: 6.58 billion DAI (there is no cap on the supply)

Current Price (As of 22 Aug 2021): US$1

5. TerrraUSD (UST)

Next up we have TerraUSD (UST), an algorithmic stablecoin built on the Terra blockchain protocol.

UST is pegged to US$1 using a mechanism that is algorithmically based.

An important thing to note is that stablecoin is 100% algorithmic and not backed by any collateral.

Here’s how UST’s mechanism works.

It revolves around two cryptocurrency tokens UST and Terra (LUNA).

Terra’s network will always value UST at US$1 and work towards maintaining the US$1 peg algorithmically.

The value of UST is derived from factors like the fluctuating value of the US dollar and the supply and demand forces acting on UST.

When the value of UST is worth more than US$1, LUNA holders are incentivised to sell their tokens for UST. LUNA is then burnt and UST is minted.

On the flip side, when the value of UST falls below US$1, UST holders are incentivised to sell their tokens for LUNA. UST is then burnt and LUNA is minted.

These actions and the algorithm work in tandem to bring the price of UST back to the target peg of US$1.

Market Capitalisation: US$2.64 billion

Volume (How Much Traded in 24 hours): US$190.33 million

Circulating Supply: 2.64 billion UST (there is no cap on the supply)

Current Price (As of 22 Aug 2021): US$1

Bonus: XSGD

Last but not least we have XSGD, a fiat collateralised stablecoin that is pegged 1:1 to the Singapore dollar.

XSGD coins are issued by payment platform Xfers, a Monetary Authority of Singapore (MAS) regulated company that holds a Major Payment Institution license (“MPI”) for e-money issuance.

According to Xfers:

  • Unlimited amounts of XSGD tokens can be minted by Xfers under its e-Money issuance license.
  • All XSGD tokens are backed 1:1 with Singapore Dollars held in Xfers’ reserve.
  • All funds are safeguarded in segregated accounts with Malaysian universal bank CIMB, a fully licensed MAS regulated bank.

At the time of writing, XSGD is available on two different blockchain protocols:

In addition, these smart contracts were audited by Quantstamp, an independent smart contract security audit firm headquartered in San Francisco, California.

As for access, Xfers verified users can now use their Xfers account directly to:

  • Whitelist your Ethereum or Zilliqa blockchain address to enable XSGD transfers in and out of the Xfers platform.
  • Swap XSGD (ERC-20) to XSGD (ZRC-2) using the Xfers platform.
  • Convert from XSGD to SGD and vice versa at a 1:1 rate within one business day.

XSGD is also travel rule compliant, compliant with PSN01 guidelines, and is supported by Elliptic & Merkle Science for Onchain monitoring with its infrastructure secured by leading custody solutions: Bitgo, OnChain Custodian, Fireblocks, and Ledger Vault

For context, the travel rule requires “obligations to obtain, hold, and transmit required originator and beneficiary information in order to identify and report suspicious transactions, monitor the availability of information, take freezing actions, and prohibit transactions with designated persons and entities.”

The coin is also part of a comprehensive ecosystem of partners ranging from non-custodial wallet solutions to institutional custodians, exchanges, DeFi, and Blockchain analytics tools.

Source: Xfers

Market Capitalisation: US$43.53 million

Volume (How Much Traded in 24 hours): US$3.25 million

Circulating Supply: 58.82 million XSGD coins (there is no cap on the supply)

Current Price (As of 21 Sep 2021): S$1


Can’t Get Enough of Cryptocurrencies?

Fret not!

We have partnered with SingSaver and American Express to launch this super exclusive Bitcoin campaign for the first time ever in Singapore.

You will receive up to S$365 worth of Bitcoin when you successfully apply for a credit card. This offer is ONLY available on Seedly & SingSaver. You will not find it anywhere else.

These rewards will be given out from now until 10 October 2021 OR until S$1 million worth of Bitcoin has been claimed, whichever is earlier.

Also, the first 2,000 eligible applicants will receive an additional S$100 worth of Bitcoin so get to it!

If you were wondering, these rewards will also be given out to your Gemini account as they are our exclusive cryptocurrency wallet partner for this campaign.

How to Apply:

  1. Apply for your favourite credit card.
  2. Receive up to S$265 (S$265 for new customers and S$50 for existing customers) worth of Bitcoin after you fulfil the eligibility requirements.)
  3. Spend S$500 on the card within the first 30 days of card approval.
  4. Be one of the first 2,000 eligible applicants to receive up to an additional S$100 worth of Bitcoin.

Eligible Cards: American Express in Singapore

Here are the cards you can apply for with this campaign:

More details about the cards can be found on the landing page. And of course, terms and conditions apply.

Disclaimer: Seedly and Singsaver will never ask you for your crypto wallet address nor instruct you to transfer any crypto to us throughout any of the campaigns.

Advertisement

profile
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.
You can contribute your thoughts like Joel Koh here.

Still have more questions after reading the article? Fret not, ask our community here!

Stay updated with the latest finance tips!
Receive bite-sized finance on Telegram here.

What's Popular

    • Loading articles
    • Loading articles
    • Loading articles
    • Loading articles
    • Loading articles

What's Popular

    • Loading articles
    • Loading articles
    • Loading articles
    • Loading articles
    • Loading articles

Still have more questions after reading the article? Fret not, ask our community here!

Get up to S$365 worth of Bitcoin! T&Cs apply!

reward

Get up to S$365 worth of Bitcoin

Valid till Oct 10