Stablecoins are a huge topic in the crypto space as of late. As many of you know, the great Terra-Luna crash has sparked major controversy in the crypto space, wiping over $18 billion in crypto value over a matter of days. TerraUSD (UST), a stablecoin on the Terra ecosystem that was designed to be maintained at $1, was debugged in May 2022. The problem then arises. What good is a stablecoin if its value is unstable? In this article, we will talk about what stablecoins are and whether they are still safe to invest in.
When we talk about cryptocurrencies, the first few problems that come to mind are volatility. From time to time, we come across headlines and stories of individuals losing everything in a matter of hours or days, which is a huge problem in the crypto space since its beginning. Therefore, the function of stablecoins draws significant importance in providing a stable asset class for cryptocurrency holders to stay protected through market fluctuations.
What Are Stablecoins?
Stablecoins are a type of cryptocurrency that has its value pegged to another asset such as the US dollar, commodities, etc. Which, in simple terms, it means that the price of a stable coin will be maintained at a specific price point, making it a great way for investors to store and trade value in the cryptoverse.
There are currently 4 main types of stablecoins in the market:
Fiat Backed Stablecoins: Fiat-backed stablecoins, like USDT, typically have better stability and are known to be the safest as they are backed by actual assets, and have huge cash reserves. They are usually backed by a fiat currency such as the USD at a 1:1 ratio.
Cryptocurrency Backed Stablecoins: Following the same logic, crypto-backed stable coins like DAI are backed by cryptocurrencies. Although we will not be able to enjoy the same level of security as fiat-backed stablecoins, such stablecoins are more decentralized, thus providing better transparency.
Commodity Backed Stablecoins: This type of stablecoin is tied to the value of commodities such as gold and is generally well sought after as the value of gold tends to appreciate over time.
Algorithmic Stablecoins: Algorithmic stablecoins are known to be the riskiest type of stablecoin as any real-world asset does not back them. Terra-Luna (UST) is a type of algorithmic stablecoin that went on a “death spiral” which led to its demise.
Top 5 Stablecoins in the market
(Values and rankings are at the time of this article)
- (USDT) Tether — $72,518,255,207 Market Cap
- (USDC) USD Coin — $53,840,385,911 Market Cap
- (BUSD) Binance USD — $18,290,759,058 Market Cap
- (DAI) Dai — $6,493,494,493 Market Cap
- (FRAX) Frax — $1,481,622,557 Market Cap
Are Stablecoins still safe?
Our take is that Stablecoins are safe and are definitely here to stay. To safeguard your interest, you should always DYOR and ensure that you know exactly what you are getting into before parking your money. It is important to note that not every stablecoin will share the same ill fate as Terra as each follows different rules. Stablecoins like UST are a type of algorithmic stablecoin that have received backlash from crypto experts, as they face huge risks and are normally not backed by any real-world assets. On the other hand, coins like USDT is a fiat-backed stablecoin that claims to be backed by real assets and have proved to remain stable in times of crisis.
We will dive deeper into how you can earn from stablecoin staking to further maximize your profits in our next article. DeFi platforms like CoinWind offer stablecoin mining products for you to leverage where you can enjoy high APYs. Don’t miss out!
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