The digital asset sector is in the middle of a meltdown, and a large contributing cause is the failed stablecoin experiment known as TerraUSD (UST). This algorithmic stablecoin recently failed to maintain its 1:1 peg with the US Dollar, resulting in both it and LUNA to plummet in value. Despite this failure, stablecoins remain an integral part of the sector, and will continue to play an important role as both a transfer medium and safe-haven from market volatility. The following are a few examples of the markets current crop of top stablecoins.
Algorithmic vs. Asset Backed
Before we dive in to what make up the markets top stablecoins, it is important to understand how such assets function. While they may share a title, stablecoins can typically be broken down in to two categories – Algorithmic and Asset Backed. The goal of each is to maintain parity with a pegged asset, which is often the US Dollar.
Algorithmic stablecoins typically attempt to achieve this parity through two coin systems, which incentivize the creation and burning of one another. In theory, if UST were to increase in value above $1, users can convert $1 worth of LUNA for 1 UST – essentially using arbitrage as a means of promoting stability. By increasing the circulating supply of UST, the assets price is nudged back downwards towards parity. This scenario also works in reverse if UST were to begin dropping in value. While we won’t get in to what caused the recent collapse of this popular pair of assets, it has become quite apparent that algorithmic stablecoins are flawed, and are certainly not the way forward.
The other tried and true method for structuring a stablecoin is to maintain parity by asset backing/collateral. This means maintaining $1 in unrelated assets in holdings for every coin in circulation. It should be noted that while the top stablecoins maintain a 1:1 ratio between backing asset and circulating coins, this does not necessarily take form purely as FIAT. While these types of stablecoins may waver over short periods from their pegging, they have proven to be robust and reliable for nearly a decade. Even among asset backed stablecoins, it is important to remember that while the concept and structuring of such a token has proven reliable, this hinges on the practices of their issuer and associated reserves.
USD Coin (USDC)
Created by the ‘Circle Consoritum’ (Circle and Coinbase), USD Coin is viewed as one of the most trustworthy stablecoins on offer. It maintains a 1:1 peg with the US dollar by maintaining reserves of FIAT and bonds of equal or greater value than its coins in circulation.
Of all the stablecoins currently on offer, USD Coin is the most regulated and transparent. The Circle Consortium indicates that this involves not only performing regular audits on its reserves, but also registering with FinCEN, and being regulated on the same level as companies such as ‘…PayPal, Venmo, Apple Pay, among other globally trusted firms.’
At time of writing, USD Coin maintains a market cap of roughly $65,000,000,000, making it the 5th largest digital asset of any kind.
Possibly the most well-known stablecoin is none other than Tether (USDT) – a product owned and controlled by popular exchange Bitfinex.
It should be noted that over the years, the true value of reserves held by Tether have been called in to question. This most was no more obvious than in October of 2021 when the CFTC levied a $41M fine against Tether for misrepresenting the true worth of its holdings. It was found that for a period stretching roughly three years that – despite stating otherwise – Tether did not maintain a 1:1 backing of its stablecoin, misleading investors along the way. Overall though, Tether has established a proven track-record of holding its peg quite well for nearly a decade.
At time of writing, Tether maintains a market cap of roughly $105,000,000,000, making it the third largest digital asset of any kind.
Pax Gold (PAXG)
While USDC and USDT both prioritize FIAT holdings as a backing asset, not everyone views this as a positive. Many of the worlds FIAT currencies are currently experiencing high levels of inflation, making them unattractive assets. Traditionally, in times like this, people would turn to assets like gold, which are viewed as reliable hedge assets that hold their value. With that in mind, users may be keen on checking out projects such as PAX Gold.
Pax Gold is a stablecoin which functions in the same manner as both of the previously listed examples, except its value is not pegged to the US dollar. Rather, it is pegged to the price of gold, with each token representing a portion of a gold bar. While it is most definitely more niche than either USDC or USDST, Pax Gold offers investors a spin on the proven concept of asset-backed stablecoins.
At time of writing, Pax Gold maintains a market cap of roughly $773,172,158, making it the 83rd largest digital asset of any kind.
Fear the Stablecoin
Over the past few months, regulators from around the world have noted that it is stablecoins which pose the greatest threat to the existing financial system, and require oversight as a result. This fear of stablecoins is clearly justified based on the recent events involving TerraUSD which saw investors discover that their ‘stable’ and safe holdings were anything but, and suffered catastrophic losses. If someone buys a small-cap digital asset, it is expected that its price will be volatile. If an investor buys a stablecoin, it is expected that your holdings will be safe from a change in value.
When this ceases to be the case, as was with TerraUSD, expect to see a concerted effort by regulators moving forward as they attempt to reign in stablecoins.