One of the biggest criticisms that crypto sceptics love to mention is how prices of popular cryptocurrencies are so volatile and unpredictable. This, they claim, would relegate their usefulness to the realm of speculative investments.
After all, any form of currency that wishes to have some chance of being widely adopted as a form of payment would need to retain a high degree of stability, liquidity, and trust.
What if we told you that you could have the best of both worlds – that is, the decentralised, blockchain-powered possibilities of a cryptocurrency, coupled with the kind of predictability that traditional fiat currencies provide.
We’ll jump in right away, but if such topics sound intriguing to you, do consider subscribing to Financial Freedom, an exclusive newsletter that covers exciting happenings and opportunities in decentralised finance.
Stablecoins are a type of cryptocurrency that seeks to reduce price volatility.
They do so primarily by tracking the value of an underlying asset, most commonly a fiat currency like the US Dollar or Singapore Dollar, but also commodities like gold and oil, as well as other cryptocurrencies (also known as on-chain collateral). There are also a class of algorithmic stablecoins that are not backed by reserves, and instead maintain price stability by controlling the coin supply relative to its demand.
For those who are familiar with investing, you know that an Exchange Traded Fund (ETF) provides exposure to a particular index by buying the constituent stocks. As counters in the index rise (or fall) in value, so does the value of the ETF.
Likewise, stablecoins retain their value because there the actual assets they are being pegged to are being held in reserve. For all intents and purposes, they are akin to digital representations of the underlying assets.
Thus, if a stablecoin issuer has $1 million in cash, they can issue 1 million tokens, each with a value of $1. You can keep, transfer, or spend these stablecoins, safe in the knowledge that you cash out those stablecoins at any time in exchange for the corresponding real-world asset.
Here are the top 10 biggest stablecoins by market capitalisation, as of mid-October 2021, according to CoinGecko, a website that tracks the market capitalisation and popularity of cryptocurrencies. All figures are in US Dollars.
While these figures are impressive, these are dwarfed by the market capitalisations of the most popular cryptocurrencies, such as Bitcoin and Ethereum, which currently have a market cap of more than $1 trillion and $447 billion, respectively.
This is not surprising. Unlike Bitcoin and Ethereum (whose value can rise and fall purely based on market sentiments), stablecoins are backed by underlying assets and any growth in market capitalisation would come from the actual infusion of assets into the stablecoins’ reserves.
Despite their popularity, one huge barrier to the greater adoption of cryptocurrencies like Bitcoin and Ethereum as a method of payment is their price volatility.
Stablecoins address this concern by maintaining a stable price, while providing the benefits of a blockchain-based cryptocurrency, like 24/7 availability, ease of cross-border transfers, and potential for features self-executing smart contracts.
Because stablecoins were created with a single-minded emphasis on utility and predictability, their prices are unlikely to moon, which can be seen as a plus, since stablecoin-holders would unlikely be caught in a speculative bubble that suddenly burst and lose a huge chunk of change.
These desirable traits have already allowed stablecoins to make inroads into operating alongside the traditional financial system.
Visa piloted the settling of transactions using the stablecoin USD Coin on the Ethereum blockchain, and the volume of crypto transactions handled by Visa has continue to grow. Its biggest rival Mastercard is also bringing cryptocurrencies onto its network.
As a form of cryptocurrency, stablecoins have similar risk characteristics that other cryptocurrencies have, including technology risks and counterparty risks.
However, there is one particular risk unique to stablecoins that are pegged to assets: reserve risk.
Since their value is pegged to the value of assets held in reserve, not having confidence in this process would undermine the very existence and utility of that particular stablecoin. Thus, buyers of stablecoins should do their due diligence by scrutinising stablecoin issuers’ track records, evaluate their reserve policy, and examine reserve reports issued.
Now that we’ve introduced the stablecoins and discussed their pros and cons, you might be wondering how they compare with the granddaddy of the crypto world, Bitcoin.
If you’re as excited about the possibilities of stablecoins, then you’re in the right place!
DeZy is a technology stack that manages xSGD. Via DeZy, users to receive attractive yields. Some might consider this a superior alternative to some traditional savings opportunities, which are notorious for low yields that would not even outpace inflation.
As a FinTech platform built on decentralised rails, Dezy unlocks the potential of stablecoins at considerably low risk, especially for non-cryptocurrency enthusiasts. Thanks to our technology platform, economies of scale and efficiency in processing transactions, Dezy is also able to offer this product to users without fees.
Superior returns and no fees aside, Dezy also does not have any lock-in, which means you can withdraw your funds and earnings at any time with no penalties. This means you enjoy superior liquidity compared to traditional financial instruments and other FinTech products like cash management accounts.
With no minimum deposit and 0 lock-in, there really isn’t any reason not to make Dezy a part of your personal finance toolkit. Give our online registration process a try, and you’ll be up and running in just 3 minutes.
If you made it this far, you’re probably excited about how we’re making decentralised finance easy, and we can’t wait for you to see what else we’re working on next. Join our mailing list to be the first to hear about it.
Decentralised finance is an emerging field with fluid regulations. Learn more about the risks involved.