The great volatility that has always characterized crypto price fluctuations has led investors to protect themselves from these swings. Moreover, e-commerce platforms, which want to utilize blockchain technology in their business, cannot risk heavy losses due to the strong depreciation of cryptocurrencies as a means of payment.
These were the major uncertainties holding back the mass adoption of blockchain in different sectors. As a result, to facilitate the implementation and support of crypto as a means of exchange, stablecoins were created to provide more stability and accessibility.
Stablecoins are a variant of cryptocurrencies or tokens familiar to everyone and they are called so because their value remains permanently tied to its underlying, through an algorithm that automatically sets buy and sell orders to balance the disequilibrium in the market.
There are now many types of stablecoins in circulation, each born from different projects with different purposes; they can be divided according to the type of collateralization, which can be off-chain or on-chain. Currently, the most used are those belonging to the first type, although the latter are becoming increasingly relevant due to their particular use case. In more detail, stablecoins collateralized off-chain are all those whose price is linked to the value of a fiat currency or a physical asset, such as gold, at a 1:1 rate.
The most famous are mostly linked to the value of the dollar and the one that certainly stands out compared to the others in terms of trading volumes is USD Tether (USDT), the stablecoin issued by the Tether company developed through the Omni Layer, a protocol built on the Bitcoin blockchain. USDT currently has a daily volume of $52.79B. There are also several variants of USDT including its tokenized version based on Ethereum’s ERC20 protocol and the one whose value is linked 1:1 with the euro, EURT.
Stablecoins issued on Ethereum Blockchain
The following, in order of importance, volume and market capitalization are the other stablecoins that have the dollar as their underlying: USD Coin (USDC), issued by Goldman Sachs and marketed on Poloniex, Paxos Standard Token (PAX) which was advertised on Binance through a trading competition and finally TrueUSD (TUSD).
The three aforementioned stablecoins were issued directly on the Ethereum blockchain as ERC20 tokens. The greatest advantage of being an ERC20 token is that the stablecoin can be used within dApps because of the compatibility, as they are all developed on the Ethereum blockchain. To buy them it is possible to resort to the main centralized exchanges like Coinbase, Binance, Bitfinex, Poloniex and Kraken. Users who already have tokens in their wallets can exchange them with the desired stablecoin directly through the available DEXs, such as Uniswap, KyberSwap and Bancor.
As mentioned earlier, the price of a stablecoin collateralized off-chain can also be linked to a real asset, such as a raw material for example.
This is the case of Ekon (EKG), a stablecoin developed by Eidoo; the difference with the others is that its value is linked to the price of a gram of gold. Thanks to this, it is possible to buy gold without really owning it, bringing the asset into the digital world. The ownership is certified on the blockchain and it is the protocol itself that checks the respective gold reserves in real-time before issuing an order.
Stablecoins Collateralized On-Chain
Moving on to stablecoins collateralized on-chain, there are mainly two noteworthy ones that are revolutionizing the DeFi landscape. These are issued directly within the dApps from which they originate through a more complex process than the one used for the previously discussed stablecoins.
The first one is called DAI; it was created by the company MakerDAO and like the others is linked 1:1 with the dollar. The substantial difference, however, is that in order to be generated, a CDP must first be opened by depositing as collateral a certain value in ETH. During the last few years, DAI has seen its adoption become a focal point for all the other DeFi platforms that use it as the main driver of their processes.
While the generic name related to the second stablecoin is Synth and its operation is a bit more distinctive than the other one. In fact, a Synth can be linked to the value of several synthetic assets, such as stocks, indices, commodities and fiat currencies, which track their performance in the real world. To generate a Synth linked to the dollar, for example, namely a sUSD, it is necessary, similar to DAI, to deposit a certain amount of collateral in ETH or, in this case, in SNX, the native token of the Synthetix platform.
It is precisely for this reason that they are described as collateralized on-chain since the collateral used to issue the desired amount of the stablecoin is already part of the blockchain and not a real asset.