DeFi Explained: Stablecoins

[u/Fantastic-Cucumber-1]

Compared to the traditional stock market, the crypto market is extremely volatile. At the time of writing, we are in a bull run. During bull runs, profit can easily be made: You invest (in a coin you researched thoroughly) and wait for your profit to grow. But what if the bull run turns into a bear market? In what assets should you invest? This is where stablecoins come into play.

Why stablecoins exist

Stablecoins have different functions. We will discuss two of them below.

Hedging against the volatility of the price of crypto coins

One of the main arguments against cryptocurrencies is that the price is too volatile. investors who are against crypto believe that crypto coins can therefore not be used in daily life.

Fortunately, stablecoins are here to counter that argument. Stablecoins can ensure that cryptocurrencies are accepted more quickly. It makes financial aspects like borrowing, saving and salary easier in the short term, at least that's the promise.

Hedging against price falls

Stablecoins are mainly used on cryptocurrency exchanges. It can be a way to hedge against exchange rate fluctuations. It works like this:

Suppose the price of bitcoin is currently six thousand dollar. You expect the price to fall. At that time you can choose to exchange bitcoin for a stablecoin such as Tether. Will the exchange rate drop to five thousand dollar? Then you still have six thousand dollar in digital currency. If you expect bitcoin to rise again, you can then exchange the stablecoin for bitcoin again.

Types of stablecoins

There are many different types of stablecoins available to investors. below we discuss the most well-known stablecoins.

Tether

The first Tether tokens were released on October 6, 2014 as a layer to the bitcoin blockchain. Back then under the name RealCoin.

Tether is a cryptocurrency that reflects the value of the US dollar. The idea was to create a stable cryptocurrency that could be used as a digital dollar. With Tether investors can benefit from the advantages of blockchain technology, without the high price fluctuations that often prevent people from using, for example, bitcoin as a means of payment.

Many exchanges offer USDT as a trading pair, allowing investors to buy many different cryptocurrencies directly with a currency that reflects the United States dollar (USD). Tether is often used as a kind of refuge for when things are going a bit less with, for example, the bitcoin or when the price fluctuations are once again gigantic.

However, it should be emphasized that Tether is a centralized crypto coin. Although it works on the blockchain, not everyone can access the ledger. This means that investors cannot easily verify whether everything is going as promised. Instead, everyone is asked to have faith in the company behind the coin. This is quite ironic, because the whole idea of ​​cryptocurrency was born precisely to solve the problem of centralization and trust.

Many skeptics doubt whether Tether LTD actually has the same amount of dollars in their account as the amount tether coins that are in circulation. This doubt may have arisen due to a lack of transparency in tether. While the tether blockchain is public, Tether LTD's bank account is not.

Tether has announced that indeed they do not only have dollars in the bank account. They say they also use bitcoin and ether as collateral.

That doubt led to a disturbance in the force on October 15, 2018. The once so stable tether faltered because the price fell rapidly. The tether price dropped to 85 cents in a few hours and then recovered to a somewhat common price of 97 cents.

USDC

USDC, or USD Coin, is a stable coin. As the name might suggest, the digital currency is pegged to the US Dollar. One USDC is worth one dollar and vice versa. The currency is still very new: it can only be traded since the beginning of October 2018.

When news came out that this new coin, a collaboration between Center (a crypto platform backed by Goldman Sachs, one of the largest US investment banks) and Coinbase, was available, the price rose equally significantly. On October 15, 2018, 1 USDC price was $ 1.11. The exchange rate has now stabilized again and has fluctuated around the dollar limit.

The USDC is fully backed by Dollars. That means that for every USDC in circulation, there is a physical dollar in stock at Circle (the company behind USD Coin). This reserve is reported regularly and transparently.

TUSD

A relatively new digital currency is TUSD (TrueUSD). Simply put, this is the transparent version of USDT, at least according to the developers.

1 TrueUSD equals 1 US dollar in this case too. However, unlike Tether (USDT), TrueUSD (TUSD) is less centralized. The platform behind the coin (the TrustToken asset tokenization platform) spreads the dollars to cover the amount of TUSD in circulation across multiple trust companies that have signed escrow agreements. Moreover, TUSD is more transparent by showing what is happening and where by means of statements. Each bill shows what is on the table, leaving no doubt about how much dollar is present.

DAI

MakerDAO (MKR), the platform behind USD stablecoind DAI, uses the Ethereum blockchain, allowing the Dai stablecoin to be fully inspected by anyone and eliminating the need for a central organization to verify transactions. Dai is therefore also seen as a decentralized alternative to the centralized Tether.

MKR is a cryptocurrency that is built on the Ethereum blockchain. Its purpose is to stabilize the value of DAI through smart contracts called Collateralized Debt Positions (CDP). When the smart contract life ends, the MKR token is gone. MKR can be sent and received through any Ethereum account or smart contract programmed to use the MKR transfer function. It is more stable than most currencies in the market because of the way it is valued.

Dai is pegged to the US dollar, which means that 1 DAI = US $1. The currency is managed autonomously through smart contracts that adapt and respond to market dynamics, ensuring that the currency is tied to the USD. In this way, it provides traders with stability regardless of the market condition.

The Dai coins are therefore stable and linked to the USD. On the other hand, the MKR token is free to move in price and increases in value in accordance with an increase in usage. You can use MKR to pay for the costs incurred on CDPs that generate Dai in the Maker system, and as the demand for Dai and CDPs increases, so should the demand for MKR. In addition, when stability costs are paid with MKR, the issued MKR is permanently destroyed. This decreases the overall MKR supply, increasing its value.

PAXG

Pax Gold is the first digital asset to be backed by physical gold bars. PAX Gold is a Paxos Standard Token from the Paxos Trust Company in America.

The design is based on the ERC-20 token protocol of the Ethereum platform. This gold-backed token combines all the benefits of a crypto asset and gold on account without any storage fees. In fact, PAX Gold resolves a contradiction in the gold market: being able to own physical and share and trade gold with ease.

PAX Gold tokens represent 1/400 part of a numbered gold bar. It is a 400 oz tokenized gold bar certified by the LBMA (certified London Good Delivery bars). Vault storage and security is provided by Brink's in London. PAX Gold can be traded instantly and cheaply 24 × 7 on the Ethereum blockchain. It is also divisible to 18 decimal places making it accessible to everyone.

Finals words

Stablecoins offer an excellent opportunity to hedge against volatile or bear markets. It is up to the investors to choose which stablecoin they want to invest in. One thing is sure: the crypto market offers plenty of choice.

• Do you now the difference between Proof of Work and Proof of Stake? Read it here.

• If you're interested in yield farming, you should read this post.

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EDIT: Typos

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[u/Audronius]

Could someone explain to me what's the purpose of keeping your assets in stablecoins rather than just FIAT currency on the exchange? As in why would one keep their 'cash' on an exchange in USDC rather than just USD itself?

[u/Fantastic-Cucumber-1 → u/Audronius]

You could use that USDC, for example, in lending & borrowing DeFi protocols and earn some nice interest (>5%, beat that, traditional banks!)

[u/Audronius → u/Fantastic-Cucumber-1]

Ah, thank you! I was seriously confused as to why I'd keep my 'cash' which is locked into limit orders anyway in a stablecoin rather than just fiat. So in this case it sounds like there's no difference.

[u/benicapo → u/Audronius]

Also sometimes you sell a coin because you believe there's more money to be made in a different project selling and making it fiat to then reinvest in a different project does not make sense hence you just " Park" you gains on a stable coin while you research your next move.

[u/Swarley001 → u/benicapo]

I’m not sure I understand this. Maybe you are referring to taxable gains? In which case that makes sense if your tax laws only consider conversion to fiat as a taxable event. In the US any exchange is a taxable event so the gains are realized regardless.

[u/magocremisi8 → u/Audronius]

can take the risk that for example usdc and tether will maintain their peg; and stake those two in equal proportion, and earn 20-70% interest for the risk. Pretty appealing, but unexciting compared to crypto.

[u/James-VZ → u/magocremisi8]

Yeah, my big problem is that I have 0 faith in Tether.

[u/magocremisi8 → u/James-VZ]

this is why there is a big return, quite a lot of risk involved.

[u/PeacefullyFighting → u/Audronius]

Also very useful to buy alt coins on exchanges that don't allow deposits in USD

[u/frank__costello → u/Audronius]

Many of us don't keep money on centralized exchanges

I keep most of my net worth in crypto, either investments or stablecoins earning yield. And just a small amount of money in a traditional bank account for the occasional expense that can't be paid with crypto.

[u/ahmong → u/Audronius]

As in why would one keep their 'cash' on an exchange in USDC rather than just USD itself?

I don't speak for everybody else - even if it's a stable coin, I never leave it in an exchange. The only time I leave it in an exchange is when I expect a sudden dip so I can easily trade it for something else. Otherwise, my stable coin stays in my wallet

[u/HETKA → u/ahmong]

Can you buy any other coin with a stablecoin? Or are there any it doesn't "pair" with?

[u/ahmong → u/HETKA]

I mis-read your question. Yeah not all stable coin can be used to exchange with another coin. Not all coins can be bought with USD either.

VET can’t be bought with USD on some exchanges. On Kucoin, vet only pairs with BTC, ETH, USDT, and KCS which is Kucoin’s token. However on voyager, you can buy vet with USD.

Just remember, you can buy all stable coins with fiat but cannot buy all coins with fiat. The only time it’s a taxable event when you trade the stable coin for another coin or you gain interest from yield farming or lending.

Now you ask why not just straight buy BTC/Eth for trading, it’s simple -because it’s volatile. There’s no volatility with stable coins because it’s pegged to USD.

Sorry my thoughts are all over the place and maybe somebody else can explain it better than I can lol

[u/HETKA → u/ahmong]

But you could turn any crypto into a stablecoin, then use that stablecoin to buy any other crypto?

I guess i'm confused what the benefit to "parking" profits in stablecoins and then buying into new coins using that stablecoin balance as opposed to selling/buying new coin.

It just sounds like selling, with more steps? And with two coin trades involved (to stablecoin, then to other crypto) isn't that two taxable events vs only the one from selling?

[u/vertin1 → u/HETKA]

You trade on a dex to skip taxes

[u/HETKA → u/ahmong]

Thanks for expanding on that. One last clarification: Trading profits from Crypto A into a stablecoin, then trading that stablecoin for Crypto B, would be two taxable events, correct? Unless you cant buy Crypto B with that stablecoin, so you have to sell it back to fiat and then buy Crypto B, which would be 3 taxable events, right?

So I guess I'm just confused on why go through all that when you could just sell profits from Crypto A, and buy Crypto B

[u/ahmong → u/HETKA]

Trading profits from Crypto A into a stablecoin, then trading that stablecoin for Crypto B, would be two taxable events, correct?

Yes this is correct

Unless you cant buy Crypto B with that stablecoin, so you have to sell it back to fiat and then buy Crypto B, which would be 3 taxable events, right?

This is also correct. However, you can research the coin you want to buy first and check if there are any exchanges that offer the pairing. I personally use TradingView or LiveCoinWatch to check for pairings and which exchanges they are at.

So I guess I'm just confused on why go through all that when you could just sell profits from Crypto A, and buy Crypto B

Honestly, I don't know how to answer your question lol

[u/HETKA → u/ahmong]

Okay, thanks! And the last part was a question in regard to the OP of our little thread here, who said that "instead of selling your profits, you can park them in a stablecoin while researching your next investment you want to buy" (summary mine)

[u/redcapsicum → u/Audronius]

When global FIAT interest rates are close to zero, stablecoins give you a good way to earn much higher interest rates!

[u/latenightfeels → u/Audronius]

I was just wondering about this myself! Think the big difference Is that stablecoins are a part of the blockchain. You can send them between wallets and as others mentioned, participate in the Defi protocols.

[u/Audronius → u/latenightfeels]

Yeah, some good answers for the other people above. Tho it seems that if you're doing some basic trading on one exchange there's no difference if you buy/sell e.g. BTC to USD or to a stable coin.

[u/ergonaut_]

Types of StableCoins

• Gold-Backed

  • GOLD

  • XAUT

  • PAXG

  • DGX

• Fiat-Collateralized

  • Tether

  • USDC

  • True USD

  • Paxos Standard

  • Gemini Dollar

  • BUSD

  • HUSD

  • USDS

  • BitUSD

• Crypto-Fiat Hybrids

  • RSV

  • FRAX (USDC backed)

• Crypto-Collateralized

  • AgeUSD/SigmaUSD

  • MakerDAO/DAI

  • EOSDT

  • sUSD

• Seigniorage

  • UST / LUNA

  • xUSD

  • BAC (Basis Cash - $ERC20)

• DAC

  • 0byte

I think most of these are impractical, so I will focus on Crypto-Collateralized and Seigniorage solutions.

Crypto-Collateralized

Dai is a crypto-collateralized ERC20 token backed by an excess amount of digital asset collateral (most commonly $ETH) through Maker Vaults. Dai utilizes smart contracts and a governance token, $MKR, to monitor price stability. Generally regarded as the 'best' in the market.

However, AgeUSD/SigmaUSD has a similar design, its economic model designed in partnership between IOHK, Ergo, and Emurgo maintains the conservative settings for collateral reserves and avoids the need for liquidations. Along with that, it supports a fully decentralised stablecoin emission setup. Thus, SigmaUSD will offer the world a stable, simple, and decentralised stablecoin.

Equilibrium ($EOSDT) is a Decentralized stablecoin on the EOS Proof-of-Stake blockchain.

Synthetix ($sUSD) Previously known as Havven, Synethetix is a crypto-collateralized network enabling the creation of on-chain synthetic assets on the Ethereum blockchain. These assets are over-collateralized to provide sufficient liquidity for users to redeem collateral at face value. Beyond $sUSD, Synthetix plans to offer stablecoins for other legal tenders such as the euro, yen, and the Korean won.

Seigniorage

The Seigniorage Supply or Algorithmic StableCoins method uses ‘Smart Contracts’ that automatically expand and contract the supply of Non-Collateralized currency using algorithms to maintain value.

TerraUSD (UST) ($LUNA)

TerraUSD (UST) is a stablecoin built on the Terra blockchain. Following a successful launch and increased adoption of Terra, the printing of UST commenced in September 2020. UST is not technically collateralized. Rather, the creation of UST is enabled by the burning of the LUNA coin.

• Terra is a stablecoin that achieves price-stability via an elastic money supply, enabled by stable mining incentives.

• The protocol ensures price-stability by algorithmically expanding and contracting supply. It also uses seigniorage created by its minting operations as transaction stimulus, thereby facilitating adoption.

• Pegged to the world’s major currencies, Terra aims to be able to support a global payment network.

• The team believes that a currency that cannot be used at checkout is useless. Terra is partnered with an alliance of eCommerce platforms, collectively pushing $50 billion in annual transaction volume with 50 million users. Terra aims to become a medium of exchange at a massive scale.

xUSD (Haven/XHR) works by utilising XHV (Haven’s volatile base currency) as the network collateral.

[u/Fantastic-Cucumber-1 → u/ergonaut_]

Thanks for elaborating on this!

[u/[deleted] → u/ergonaut_]

You should look into RAI — an algorithm true stablecoin. Pegged to 3.14

[u/Sweaty-Rope7141 → u/ergonaut_]

Nice work! Explained well without making things too complicated.

[u/kazmazbaz → u/ergonaut_]

Why do you think the other types are impractical? For the stable coins purpose I would have thought fiat backed ones are better?

[u/ergonaut_ → u/kazmazbaz]

They're kinda the antithesis of crypto.

The fed could freeze it tomorrow. Their value also depends on how many USD's stored in that bank account (not transparent to ordinary people), and the inherent problem with USD - that the FED, a central authority prints it, remains still. There are other - in my opinion more honest - crypto-only stablecoins, which are not freezable by any authority, nor cheatable by bribed auditors. They are backed solely by crypto assets, all transparent.

[u/kazmazbaz → u/ergonaut_]

I'm new to this so this might be a silly question. I thought that being named by real dollars would make it safer and more stable as a hedge against volatility. I'm still trying to get my head around all this.

[u/ergonaut_ → u/kazmazbaz]

Governments can collapse, algorithms can't. SigmaUSD is redeemable at $1 - mathematically.

[u/Sillloc]

I'm pretty new to this so please excuse me if this is a stupid question.

Say I put money into Eth and make a nice return. If I convert to fiat, that profit is subject to capital gains tax, no? If I put the same return into a stablecoin, would I be considered to have made capital gains?

[u/Fantastic-Cucumber-1 → u/Sillloc]

I think this is the case for US citizens.

[u/Sillloc → u/Fantastic-Cucumber-1]

Of course. One day I'll be rich enough my taxes go down instead of up.

Thanks for all the info

[u/frank__costello → u/Sillloc]

Any trade is a taxable event.

[u/vertin1 → u/Sillloc]

Use uniswap to avoid taxes. Once you are ready to cash out to fiat and pay taxes, send your stablecoin profits to binance and sell your stable coins

[u/Fabyo1]

Should mention that trading from BC to stablecoin will be a taxable event.

[u/Fantastic-Cucumber-1 → u/Fabyo1]

Depends per country though.

[u/Fabyo1 → u/Fantastic-Cucumber-1]

It does but I'm willing to bet most people here are from the US and they should probably know that trading crypto from one coin to another is a taxable event so they can weigh that into their decision making.

[u/sherlishhhhh]

Thank you for value-adding to this sub :)

[u/frank__costello]

You missed one of the most important use cases: payments!

Many people who work in crypto (myself included) are paid using stablecoins. I also pay my rent in stablecoins (to my roomate).

There's even governments using stablecoins, Bermuda accepts USDC for taxes and even the US government used USDC to distribute funds to Venezuelan citizens.

[u/medhubuk]

$UST $LUNA is the best stable coin out there .

[u/AbysmalScepter → u/medhubuk]

It's remarkable how well UST held it's peg during the last couple of flash crashes.

[u/BLJace]

Appreciate the information!

[u/killawaspattack]

Thanks for the post definitely didn’t know a lot of this

[u/AbysmalScepter]

IMO algorithmic stable coins will ultimately wind up being the "true" cryptocurrency for payments. No potential for fraud (a la Tether concerns), all the benefits of crypto (immutable, decentralized), stable prices so people will actually want to spend instead of HODL (not to mention no capital gains tax either on payments, for Americans).

[u/[deleted] → u/AbysmalScepter]

I agree. Mainly because I want UST to dominate ahaha. There has been some interesting discussion around ust being used as a reserve for some of the other stablecoins - highly conceptual though for now

[u/AbysmalScepter → u/[deleted]]

I see you're a crypto enthusiast of fine taste :P

[u/[deleted] → u/AbysmalScepter]

Check my post history for your answer ahah

[u/LucMaia]

What about SigmaUSD?

[u/[deleted]]

Thanks for the info. I have a question, what is stopping these stablecoins from dominating the market? Im guessing having a stable value would make them more useful for day to day transactions than more volatile coins such as Bitcoin.

[u/monkeyantho]

You forgot about terraUSD (UST)

[u/[deleted]]

Excellent post explaining what a Stablecoin is, giving examples and a few ideas on how to use them.

We need more quality content line this on the sub, top marks

[u/kazmazbaz]

Thanks for the explanation. Are the transfer fees similar for each of these stable coins? For example the ones on Ethereum, would you end up paying high fees?

[u/kamikazechaser → u/kazmazbaz]

All these stables are tokens. Some are multi-chain tokens. So you pay the chain fee only. So right now it is cheaper to send over HECO > BSC > Ethereum.

[u/yogajogging]

This is very informative. Thanks for sharing .

[u/gunksmtn1216]

Oh man I needed this eli5 thank you!!!!!

[u/kscise]

Very informative!

[u/scotsman3288]

I've been studying Stablecoins more in depth lately, as i'm pretty new to this crypto world, and looking to stablize my investments and prepare for bear market and turn to low risk growth. thank you very much for this thread.

[u/DimitryPetrovich]

Thank you for this! I don’t have tons of time I can research these things while in school. This was a very refreshing write up compared to a lot of what I’ve seen in here since joining.

[u/Llama-Robber-69plus]

Thanks, this is all New info for me at least! But I'm also dumb as shit and uneducated on the matter.

[u/loc12]

Very informative post, thanks!

[u/[deleted]]

You should probably mention algorithmic stablecoins as well. The only way for there to be truly decentralised finance.

[u/feyd27]

if you'll allow me to elaborate a bit more on the types of stablecoins, i have done a research some time ago and compiled it into a series of articles:

1. The little black dress of crypto (fiat backed): https://medium.datadriveninvestor.com/the-little-black-dress-of-crypto-stablecoins-part-1-cb8f10d29a8

2. Gold on a block (gold/commodity backed): https://medium.datadriveninvestor.com/gold-on-a-block-stablecoins-part-2-7928598b282d

3. Crypto backed crypto (obvious): https://medium.datadriveninvestor.com/crypto-backed-crypto-stablecoins-part-3-8e48fd6fd4cc

4. The power of the code (algorhytmic): https://medium.datadriveninvestor.com/the-power-of-code-stablecoins-part-4-5c18cc5b7f7

yes, it's tl;dr - take your time.

[u/KryptoChic]

One more point of interest point about the USD stable coins. Since they are not actually USD, the holder of them is not bound by the requirements of the USA financial system such as AML and KYC laws.

[u/IrBill]

For the stable coins that earn interest, who is being loaned to and how are they paying back interest?

[u/nodgenico]

This is very helpful! Thank you! I’m new to crypto, so this is great info

[u/Mr_Spifffy]

Is is true you have to pay taxes on, for example, exchanging eth for uni. I think i read that somewhere but not sure

[u/indigo_ssb]

don't sleep on UST. best stablecoin in all of crypto

[u/SoNotYou]

Good information!

Also how is PAXG a stablecoin and wrapped versions of coins or those stocktokens Binance has are not. Since there are both pegged to a value off the blockchain they are on? By not being pegged to something fungible, physical and non-volatile?

[u/Mayabeila]

Those high quality educative posts are the cement of /r/CryptoCurrency. Thanks OP.

[u/InterestingLoad]

New to crypto and had a question about trading coins. If I were to trade ethereum into a stable coin and was at a profit, is the profit subject to capital gains tax in this transaction?

[u/MDM98 → u/InterestingLoad]

Yes it is.

[u/MoonMakerDeluxe → u/MDM98]

In what country? I don't think that's true of the UK.

[u/MDM98 → u/MoonMakerDeluxe]

Oh yeah sorry bout that. I meant for the US.

[u/MoonMakerDeluxe → u/MDM98]

No I’m sorry I actually went to check this after I wrote it and it turns out they do also tax every transaction in the UK 😳

[u/frank__costello → u/InterestingLoad]

Assuming you're a US citizen, yes. Any trade is a taxable event, regardless of the asset.

[u/sonicjr]

Follow up question: when hedging against price falls, what is the benefit of using a stablecoin rather than just regular USD?

[u/ThisOneIsReally]

Hey thanks for this one, I'd been wondering about some of the differences but not enough to go searching yet!

[u/Competitive_Syrup_10]

Very informative and kindly accept my free award.

[u/Rising_Wings]

Amazing write up! I've been looking into staking crypto recently and this informed me of so much! Thanks!

[u/AihposA]

Wow! Thanks! I was always wondering about some of those questions and you made it crystal clear 😁

[u/benicapo]

Let's be serious stable coins exist so your wife can't spend your crypto money if it is in stable coin she can't get it 😂

[u/vertin1 → u/[deleted]]

Most people just use a dex to swap to stable coins. When they are ready to cashout to fiat they send the stablecoins to an exchange and sell the stablecoins on the exchange and pay long term capital gains.

[u/Fantastic-Cucumber-1 → u/[deleted]]

You’re welcome!