Stablecoins and their Use Cases

What are stablecoins and why hold them?

What are stablecoins?

Stablecoins are cryptocurrencies that are pegged to the market value of an asset, such as the US Dollar or price of gold. The main reason why people use stablecoins is because of the price stability, which acts as a store of value. Another reason would be as a medium of exchange to transfer tokens through the blockchain. 

There are currently 4 types of stablecoins: fiat-backed, algorithmic, crypto-backed, as well as commodity-backed. Let us take a look at some examples of stablecoins:

Fiat-backed Stablecoins

The popular stablecoins like USDT, USDC, and BUSD are all fiat-backed, which means they are backed 1:1 with fiat currency. The fiat collateral must remain with a central issuer or financial institution, and must be proportionate to the number of stablecoin tokens in circulation. This allows the holders of these stablecoins to exchange them for $1 worth of US dollar for every 1 USD.

Algorithmic Stablecoins

An algorithmic stablecoin is an asset that relies on two types of tokens, a stablecoin and another token that supports the stablecoin. Algorithmic stable coins work by using on-chain algorithms that control the supply and demand between the asset and the stablecoin in order to keep the stablecoin pegged at US$1.00. 

Terra uses this method to keep its stablecoin UST pegged by allowing users to trade 1 UST to $1 worth of LUNA, its native cryptocurrency, when the price of UST is above $1. Vice versa, the opposite can also be done by trading $1 worth of LUNA into 1 UST when price is below peg. Due to this algorithm, whenever there is a large withdrawal of UST, the price of UST would depeg from $1 since users are swapping their UST into LUNA, resulting in the increase in supply of LUNA at the same time. This chain reaction caused the price of UST to spiral down, coupled with the fact that the huge increase in circulating supply of LUNA resulted in the huge drop in price.

Crypto-backed Stablecoins

Crypto-backed stablecoins are decentralized as they are not governed by any third-party companies or institutions. These stablecoins can be minted by providing a crypto asset into the platform and receiving a stablecoin back. An example of this is DAI, a stablecoin created by MakerDAO. Users can deposit ether (ETH) into the platform as collateral and receive their stablecoin DAI.

Commodity-backed Stablecoins

A commodity-backed stablecoin is a cryptocurrency whose value is backed by a tangible asset, like gold and silver. Examples of commodity-backed stablecoins would be Paxos Gold (PAXG) and Tether Gold (XAUT), which is pegged to the price of one troy ounce of gold. It is a great choice for investors who are less risk averse as prices of commodities are less volatile compared to other cryptocurrencies. Physical gold is also difficult to purchase and store, therefore holding these commodity-backed stablecoin is a solution.

We at RUN focus primarily on USDC and believe that everyone deserves an opportunity in supporting new businesses no matter who you are. Those who are interested in finding out more about our project can follow our Twitter @runtheship, visit runtheship.io to subscribe to our newsletter for weekly updates.