Top 5 Stablecoins for Investments in the Market

Cryptocurrencies are notoriously unstable, making people hesitant to invest in them. This is why stabelcoins were created to keep investors’ money safe. Stablecoins are ideal for investors who want to preserve their capital in the cryptocurrency markets as well as protect their funds from volatility and risk.

Stablecoin is a crypto-asset designed to maintain a stable value even during periods of extreme volatility. It does this by pegging the value of stabelcoin to another, more predictable asset, such as the U.S. dollar or gold. This ensures that the value of stabelcoin remains relatively stable even when the rest of the market experiences volatility.

What types of stabelcoins are there?

Stablecoins tied to fiat

Stablecoins tied to fiat are backed by currencies such as the euro, the pound sterling, or the U.S. dollar. These are the simplest stabelcoins with a 1:1 security ratio. This means that one stabelcoin will equal one unit of fiat currency backing it. Examples of fiat-linked stablcoins include USDT and USDC.

The price of a fiat-linked stablcoin remains stable relative to fiat currency. However, it depends on proper regulation by a trusted centralized issuing party.

Commodity-linked stackcoins

Stablecoins that are commodity-linked are backed by valuable physical assets such as precious metals, real estate, oil and other commodities. This essentially makes them blockchain-based representations of these physical assets with all the security and accessibility of a digital asset.

The most common commodity used as collateral for this type of stabelcoin is gold. However, it is important to note that these commodity-linked tokens are as stable as the asset that backs them.

The basic utility of these tokens makes commodity investments much more affordable. A single hardware wallet can hold billions of dollars worth of gold-backed stackable tokens, but physically storing the same amount of gold is a much more difficult task.

Algorithmic Stablecoins

Algorithmic steblecoins use complex sets of instructions to maintain their value and are not backed by commodities or fiat currencies. Instead, these tokens are backed by other cryptocurrencies and make adjustments to their algorithms based on supply and demand. These tokens also often require excessive collateral to minet the tokens.

If the price of Stablecoin rises, the algorithm adjusts to issue and sell more coins, and when the price falls, the algorithm adjusts to redeem tokens to keep prices afloat. These stable coins protect their peg quite reliably, but unexpected or “black swan” events can cause irreversible damage to their tokenomics and collateral reserves.

Senorage or Unsecured Stablecoins

Similar to algorithmic stablecoins, these tokens use smart contracts to execute precise sets of instructions that support token binding. However, stackable tokens do not have any reserves; instead, they rely on complex processes that govern their negotiable supply. This involves issuing and selling or buying and burning tokens according to supply and demand levels.

Top 5 Stablecoin Projects

TrueUSD (TUSD)

TrueUSD is an ERC-20 standard, dollar-backed stablecoin that is fully secured, protected, and verified by a third party. TUSD is part of the TrustToken ecosystem, which includes other fiat-backed stackcoins and uses escrow accounts to reduce counterparty risk and provide token holders with legal protection against misappropriation of funds. The platform also partners with registered fiduciaries and banks to hold TrueUSD token funds.

Pax Dollar (USDP)

Pax Dollar is another stabelcoin tied to the U.S. dollar and created to improve the broader financial ecosystem by creating a global seamless network. The Paxos firm behind USDP is also responsible for the pledge token PAXG, the most popular stackablecoin tied to the value of gold.
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DAI

DAI is a stabelcoin offered by MakerDAO, a decentralized independent organization that uses a smart contract system that allows holders to create or buy collateralized debt positions (CDP) in DAI tokens using ETH. Since all transactions are performed by smart contracts on the Ethereum network, DAI is seen as a more transparent and fairer alternative to centralized stackablecoins. It uses margin trading in response to changing market conditions, maintaining its value relative to the world’s major currencies.

PAXG

PAX Gold (PAXG) is a commodity-backed gold stackcoin issued by Paxos. Each token is physically backed by one troy ounce of gold. The PAXG token is centrally minted and burned on Ethereum by Paxos. PAXG allows you to enter the gold markets without the use of ETFs, futures contracts or other derivative products, but as mentioned above, collateralized tokens are not necessarily stable.

FEI

FEI is a decentralized ERC-20 standard steablecoin that uses various mechanisms to maintain efficient and fair capital allocation. It aims to create a technological solution that occupies the golden mean between decentralized, overcollateralized steblecoins and centralized steblecoins. The platform, governed by Minter and Burner contracts, controls token issuance through binding curves and trading incentives. In addition, the protocol maintains liquid secondary markets to generate revenue using the value under its control.

Conclusion

There is a strange dichotomy between the decentralized ideal of blockchain networks and the fact that centralized Stablecoins are the most widely used cryptocurrencies in the world. Moreover, there are serious concerns about whether these institutions have sufficient financial reserves to maintain the 1:1 collateral of the fiat stablcoins they issue, especially in a crisis.

These ratios require vendors to hold reserves of financial assets equivalent to the value of stablcoins in circulation, which varies depending on investor demand. However, these risks may diminish as more stablcoins enter the market and regulation improves to handle them.

Stablecoin development is one of the next big trends in the cryptosphere. As businesses enter this field for significant rewards and profits, stabelcoins are predicted to be one of the most powerful drivers of the digital economy of the future.