Cryptocurrency buyers usually have different reasons for investing. Some hope to ride the potential of virtual currencies and make money. Some are curious about vehicles to avoid traditional financial markets.

Others look to use their crypto portfolios as a hedge against market volatility without having to cash out to fiat. Scenarios like these are where stablecoins shine.

Bringing A Bit Of Balance

Stablecoins are a class of cryptocurrencies backed by a reserve asset like a precious metal or the U.S. Dollar. Many stablecoin creators believe the short-term price swings of popular cryptos like Bitcoin and Ethereum make them unsuitable for everyday commercial use. 

However, speculation is if consumers could have a degree of confidence in the future purchasing power of virtual currency, they would be incentivized to use them. Some of crypto’s most energetic enthusiasts point towards their potential in streamlining e-commerce transactions by facilitating payments directly between buyers and sellers.

Most are familiar with fiat-backed stablecoins. Options pegged to the price of a precious metal include Tether Gold and GoldCoin.com. Currently, there are three categories of stablecoins.

Fiat-Collateralized: This category includes coins with a fiat currency reserve. Legitimate projects will maintain an adequate amount of audited and verified financial reserves.

Crypto-Collateralized: This category lumps in virtual currency backed by other cryptocurrencies. The vast majority of projects in this realm ‘over-collateralize’ and carry out more audits to mitigate the volatility of the underlying virtual currency.

Non-Collateralized: Stablecoins that are non-collateralized do not have a reserve and instead rely on a working mechanism.

One example is Basecoin, which relies on a consensus mechanism to either increase or reduce the amount of circulating tokens. Users are permitted to buy bonds when the cryptocurrency trades for less than $1. Coins used to buy bonds are then destroyed. The opposite process takes place to expand supply. 

Working mechanisms are similar to actions a traditional central bank would take, like printing more money, to keep the circulating currency valuable. 

Breaking Down The Market’s Most Popular Crypto Stablecoins

Tether (USDT): Tether is arguably the most infamous stablecoin project in existence. It dominates the stablecoin market but has a long and colorful history since its creation in 2014. In late 2017, the U.S. Commodity Futures Trading Commission sent subpoenas to Tether and Bitfinex to gather more information. 

Tether (USDT) is pegged 1:1 with the U.S. Dollar, while also pegged to the Euro (EUST). A Chinese yuan-backed stablecoin (CHNT) has also launched. Networks that Tether is minted on include Ethereum, Tron, and EOS. The coin’s centralized nature and controversy over refusing audits and financial scrutiny have brought Tether many detractors.

MakerDAO (DAI): DAI is quite unusual compared to other typical stablecoins. It is not governed or issued through a central authority, but a decentralized community of Maker token holders. Holders maintain control over the smart contract that underpins the DAI stablecoin, Maker Protocol. To receive DAI, users send tokens to the Maker platform to be locked up. Each coin is worth $1.

The biggest benefit to this structure is it removes worries about centralization and fears that a single issuing company has all the power in controlling the supply of a stablecoin. Maker is also a big player in the rapidly-growing field of decentralized finance (DeFi).

NuBits (USNBT): USNBT is an example of an algorithmic stablecoin that relies on a dual-token design. While token holders can start the process of creating new USNBT, they’re not pegged to a specific price. Dynamic rewards for locking USNBT fosters the contraction of the entire coin’s fixed supply. 

Concerns About Stablecoins 

One of the biggest worries people have about stablecoins (aside from DAI) is centralization since the vast majority of them are linked to a particular organization. Other concerns with pegged cryptocurrencies include their reliance on traditional fiat markets and a general lack of regulation from financial authorities (so far).

The Future Of Crypto Stablecoins 

Stablecoins have become a popular investment vehicle for cryptocurrency fans looking to dive into the digital currency world while hedging against volatility. There are a number of legitimate stablecoin projects which continue to innovate in the field and present themselves as attractive investment opportunities.