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Stablecoins are an essential part of the crypto world. It protects traders and investors from market fluctuations. Stablecoins have an indexed value like the US dollar or any other currency. It helps reduce volatility and works like digital money, which can easily be transferred from one exchange to another.

There are mainly two types of stablecoins available: centralized stablecoins and decentralized stablecoins. Each of them has its own selling points. Therefore, to help you understand better, let me explain centralized and decentralized stablecoins.

So let’s go :

What is a stablecoin?

A stablecoin is a digital asset that has a fixed price, primarily $1. This helps eliminate holders from market fluctuations and provides a safe and stable digital currency to hold.

As defined by Themoneymongers.com “Stablecoins act as a midpoint between holding assets and withdrawing to fiat currency. Additionally, they are effectively used to execute cross-border payments.”

Since their prices are pegged to a reserved asset like the US dollar, they help reduce volatility compared to cryptocurrencies like Bitcoin.

Centralized vs Decentralized Stablecoins

Now that you know what stablecoins are, it’s time to talk about centralized and decentralized stablecoins.

So let’s go :

What are Centralized Stablecoins?

Centralized stablecoins are usually off-chain backed by fiat. These stablecoins are usually tied to a third-party custodian like a bank.

In centralized stablecoins, stability is achieved through a 1:1 pairing of token liabilities with the corresponding asset.

Some of the best examples of centralized stablecoins are Tether (USDT) and Coinbase (USDC). Apart from these, some of the new additions to centralized stablecoins are TUSD, PAX, BUSD, and GUSD.

These cryptocurrencies are essentially tokenized IOUs deployed on a blockchain like Ethereum. Centralized stablecoins balance supply and demand through mint and buyback mechanisms.

According to this model, users can mint stablecoins by depositing the equivalent fiat with the custodian, trading or burning the tokenized versions to recover the fiat.

Top 3 centralized stablecoins

Tether (USDT)

Tether is one of the most popular stablecoins available in the market. It was launched in 2014 as RealCoin. Also, the purpose of the coin has always been to be worth one US dollar. The supply of the coin is limited by the claimed dollar reserves.

It is also the largest stablecoin, and that is why there has always been pressure on Tether to compile regular reports on its stash. It can therefore prove that its value will always be the same as that of the US dollar.

However, the most recent report shows that only around 10% is held in cash or on deposit. In addition, half of USDT’s reserves were made up of “commercial paper”. Also, short-term debt is issued by companies to raise funds.

TrueUSD (TUSD)

TrueUSD or TUSD is another popular coin that had a limited launch in 2018. The stablecoin claims to perform regular audits, and it is the first stablecoin that is fully backed by the USD dollar.

The stablecoin audit indicates that the supply is limited by the dollars they hold. Also, the daily churn/trade rate is relatively low.

Additionally, TUSD enables DeFi and staking to earn returns on holdings. Additionally, the stablecoin is partnering with a bank for digital payments and incubating “digital asset to DeFi” projects.

Gemini USD (GUSD)

The Gemini Dollar (GUSD) is another popular stablecoin. This is pegged and backed by US dollars held in FDIC-insured bank accounts.

Stablecoin funds held in reserves are audited from time to time by accounting firm BPM LLP. The cryptocurrency was created by popular crypto exchange Gemini, which was founded by Cameron and Tyler Winklevoss in 2014.

Furthermore, the coin received approval from the New York Department of Financial Services (NYDFS) and launched in 2018.

What are Decentralized Stablecoins?

Decentralized stablecoins are fully transparent and non-custodial. No one can control decentralized stablecoins. Also, all collateral supports are visible to everyone as the funds are on a publicly verified blockchain.

This allows the stablecoin to be trustless and secure with a single entity controlling the funds. Moreover, decentralized stablecoins can be divided into two parts: crypto-collateralized and algorithmic.

Centralized stablecoins are able to increase or decrease their supply manually by minting or burning as needed. Algorithmic stablecoins, on the other hand, use smart contracts or algorithmic market operation controllers (AMOs), to automatically control supply.

Top 3 decentralized stablecoins

DAI token

According to the MakersDAO whitepaper, Dai is generated, backed, and kept stable through the use of Ethereum-based currencies deposited in MakerDAO vaults.

The deposited funds serve as collateral whenever a user wishes to withdraw their DAI currency. Additionally, since cryptocurrencies are worth more than the US dollar, MakerDAO can keep its stablecoin pegged to the US dollar at a 1-to-1 ratio.

The theory was so good that in September 2018, venture capitalist Andreesen Horowitz invested $15 million in MakerDAO.

EOSDT

EOSDT is a well-known cryptocurrency that runs on the EOS platform. The cryptocurrency has a currency supply of 2,642,505.29330823. It also refers to itself as a dollar-pegged currency that leverages underlying EOS and BTC collateral and adds additional liquidity to the market.

Moreover, the coin is very stable as the stability mechanisms are built into smart contracts to maintain a 1:1 parity with the USD. Additionally, the coin is insured by the Balance Stability Fund of 584,408.67 EOS ($1,332,451.76).

Dollar Challenge (DUSD)

The DeFi dollar is built like a stablecoin. The coin uses DeFi primitives to stay close to the dollar. The coin gives investors the ability to peg different stablecoins into its single token. Also, it protects users from any underlying risk.

Additionally, DUSD is backed by tokens from liquidity provider Curve Finance (LP) while also using Chainlink oracles to stabilize. Along with this, Curve is used to integrate lending protocols and exchange tokens. This is another key step that stabilizes the token.

In addition, to offer you maximum security, the token also offers you a staking mechanism. This adds an extra layer of protection to the token.

What can you do with stablecoins?

Minimize volatility:

As the value of cryptocurrencies like Bitcoin or Ethereum fluctuates a lot. There is no guarantee as to the evolution of the price of the part. However, on the other hand, stablecoins are pegged to a more stable currency like the US dollar. This gives buyers and sellers the certainty that the value of their holdings will not decline unpredictably.

Trade or save assets:

There is absolutely no need to have a bank account to hold stablecoins. In addition, they are quite easy to transfer.

The value of stablecoins can be easily sent around the world, including places where the US dollar may be difficult to obtain or where the local currency is unstable.

Earn interest:

Most stablecoins offer you a staking mechanism. This allows you to easily earn interest. In addition, the interest rate is higher than what the banks offer. As a result, stablecoins are considered a good investment instrument.

Transfer money at a lower cost:

Transferring stablecoins is quite cheap. As a result, people have already transferred millions of USDC and other coins with low transfer fees.

Send internationally:

Stablecoins have a fast processing time and low transaction fees compared to traditional money sending. Therefore, they are a good choice when it comes to sending money anywhere in the world.

Last words:

So that was all for what stablecoins are, why should you use them, and the difference between centralized and decentralized stablecoins. Hope this answered all your doubts about stablecoins. In case you have anything else to ask, drop a comment below.