USDT, or Tether, should sound very familiar if you have ever traded digital currencies on a crypto-platform. USDT is one of the most common stablecoins, whose popularity is fueled by the growing demand for crypto transactions. As the crypto market continues to expand, the volume per transaction has taken off from a few dollars to new highs, with more people using USDT instead of BTC as the settlement currency.
The wild price swing of cryptocurrencies propels investors to look for a fast and convenient way to turn cryptos into cash. That is when stablecoins come in. Relatively stable in price, they allow for quick swaps between cryptos and fiats, thus helping investors protect their assets against risks. Such a facilitator for circulation is even more needed when some countries forbid or limit the direct trading between fiats and digital currencies. For those who prefer not to hold cryptocurrencies, stablecoins offer an easy way to get in and out of the market without the trouble of conversion.
There are three categories of stablecoins: fiat-collateralized stablecoins, crypto-collateralized stablecoins, and algorithmic stablecoins.
USDT, the most popular stablecoins, is representative of fiat-collateralized stablecoins. As Tether wrote in the white paper, each USDT issued into circulation must be backed in a one-to-one ratio by the US dollar. In this way, this kind of digital token offers price stability by maintaining an equivalent amount of fiat reserve as collateral. Apart from USDT, TrueUSD and BUSD are also examples of this type.
DAI, WBTC, and BitCNY belong to crypto-collateralized stablecoins. They allow investors to back a lower number of stablecoins with a larger number of digital asset collateral, and at the same time, manage risk by using smart contracts to keep themselves pegged to fiat money.
Unlike the other two types of stablecoins, algorithmic stablecoins do not use any reserve but run an algorithm to regulate the supply of tokens like a central bank. Simply put, they would increase or reduce supply when the price goes above or below a target value. Examples include Basis and AMPL.
The emergence of stablecoins drastically facilitates transaction and value transfer by integrating the efficiency and speed of cryptocurrencies with the security and stability of fiat money. As a result, transactions made in stablecoins are now worth around $400 billion globally, with the market capitalization of all the stablecoins in existence exceeding $115 billion. Evidence of that boom is that USDT, first issued by Tether in 2014, has grown to the world’s largest stablecoin (controlling 54% of the market share) and third-largest cryptocurrency after ETH and BTC.
Nevertheless, stablecoins are not absolutely “stable”. According to an anonymous source, Tether, the company behind the biggest stablecoin USDT, allegedly over-issued USDT without enough reserves in early 2018. Consequently, its price dropped sharply by 10% in less than 24 hours. Algorithmic stablecoins are even less secure. In March, AMPL, ESD, and BAC saw their price flash crashed to less than a dollar. Of them, ESD was hit the hardest, with its price dipping to 0.19 dollars, which was almost next to nothing.
