Stablecoins: What you should know about USDT, USDC and DAI
As stablecoins continue to make big strides in the wider crypto market, we take a look at what the fuss is all about in this first of a four-part series on the asset.
What are stablecoins?
Stablecoins, like Bitcoin and Ether, are a type of virtual currency that can be used to buy goods and services, or even traded for a profit.
Like its more popular cousins, stablecoins also enable secure transactions via the use of a decentralized online ledger predicated on a technique known as cryptography.
The main difference is that a majority of stablecoins are pegged to a fiat currency such as the US Dollar, making them less susceptible to wild price fluctuations, and hence, more “stable”.
Other design approaches for price-stable digital tokens include crypto-collateralized, algorithmic non-collateralized and hybrid (a combination of the three).
The earliest notion of asset-pegged cryptocurrencies came about in a Mastercoin white paper authored by J.R. Willett in January 2012.
Why are stablecoins growing in popularity?
Stablecoins have existed since 2014, but its market capitalization burgeoned over three times between 2020 and 2021, as the crypto market enjoyed a pandemic resurgence thanks to higher liquidity and hedging potential.
But beyond this influx of cash, stablecoins have been used since their creation as a way of on-ramping (entering) into the crypto market. They were initially (and still are) used by investors to purchase other cryptocurrencies like BTC, as a result of digital asset exchanges not accepting US dollar transfers and having access to traditional banking services.
And unlike national currencies, stablecoins can be accessed and deployed 24 hours a day, seven days a week from anywhere in the world as long as one has an internet connection, and without having to go through an intermediary as a bank.
Although crypto prices have soared some 14 times since March 2020 – a massive turning point for traditional financial markets – stablecoins allow the crypto community to transact in familiar, less volatile currencies and assets, while still being able to leverage the benefits of blockchain technology.
But perhaps the most useful feature of stablecoins is the fact that they work with something called smart contracts. Smart contracts are business transactions that are automatically executed once predetermined conditions that are written into the contracts have been met.
Smart contracts do not require the need for a legal authority or governing body to be executed. This feature has enabled stablecoins to be used in a growing sector of crypto financial services like Matrixport and Cactus Custody. Both platforms offer lending, investing, trading and interest earning, to name a few of the many high-yielding, innovative products currently available.
What are some examples of stablecoins?
Three of today’s most popular (and valuable) stablecoins include Tether (USDT), USD Coin (USDC) and DAI.
Tether (USDT): Tether is the native token of the Tether network. It is the first stablecoin ever created, way back in 2014. As its symbol ‘USDT’ suggest, each token is pegged to the USD. This means that each tether unit issued into circulation is backed in a one-to-one ratio (i.e. one USDT is equivalent to US$1) by the corresponding fiat currency unit held in deposit by Hong Kong-based Tether Limited.
USD Coin (USDC): USDC was launched in October 2018 by the CENTRE consortium, a collaboration between Circle, Coinbase and Circle investor, Bitmain. It is also pegged to the USD, and runs on the Ethereum, Stellar, Algorand, Solana, Tron and Hedera Hashgraph systems. Every unit of the “open source, smart contract-based” stablecoin is backed by US$1 in reserve, via a combination of cash and US Treasury bonds.
DAI: Dai, developed and maintained by MakerDAO, a decentralized autonomous organization, was released in December 2017. Dai’s aim, like the USDT and USDC, is to keep the value of each token as close to US$1 as possible. It facilitates this through MakerDAO’s automated system of smart contracts in the form of a decentralised application that is hosted on the Ethereum blockchain.
What can you do with stablecoins?
As mentioned earlier, you can use stablecoins to buy goods and services online. You can also buy and sell stablecoins for profit-making purposes.
The list goes on.
Increasingly, more individuals are now using stablecoins to generate even more crypto assets via a method known popularly as staking. Staking typically involves crypto asset holders committing and storing their assets with crypto financial services platforms and decentralized protocols for a period of time, following which they will earn interest or rewards.
This is no different than in traditional finance, where an individual deposits money with a bank, then earns an interest after the scheme matures.
This simple approach is commonly known as Fixed Deposit or Fixed Income, and is just one of the many ways crypto asset holders can leverage and grow the value of their portfolio.
On the Matrixport app, you will find this and many other easy-to-use, interest-earning products that have been meticulously designed and created for all types of investment goals and risk appetites.