Stable coins are cryptocurrencies whose value is tied to a stable asset, usually fiat currency. Tether (USDT), USD Coin (USDC), and Binance USD (BUSD) are the top three most popular stable coins with a combined market capitalization of $60 million. Stable coins guarantee faster, cheaper and safer transactions without the restrictions associated with traditional banking, such as geographic restrictions and lack of financial services on holidays.
Stable coins are a category of cryptocurrencies that are more reliable and less volatile than their better-known counterparts such as Ethereum and Bitcoin, which means they have more potential for safer investments.
But which stable cryptocurrency should you choose to trade? How are stable coins different from fiat currencies? Today, you'll learn everything you need to know about stable coin offerings and how they differ from each other. Moreover, after reading, you may exchange USDT to BNB instantly on Quickex.
What Drives the Growth of Stable Coins?
Stable coins were developed as a solution to the volatility inherent in native cryptocurrencies. While assets such as Bitcoin and Ethereum interest the public with their various economic advantages, they also discourage potential new users because of unpredictable price fluctuations. BTC can fall or rise in value during a transaction, meaning it can be worth significantly more or significantly less than when it was sent, making it difficult to use as an asset.
The use of smart contracts has also seen a rise in the value of stable coins. Unlike other currencies, the code in a smart contract helps clarify contract terms to facilitate money transfers, credits and payments with limited human intervention.
How do Stable Сoins Work?
Stable coins are tokens that have been issued on multiple blockchains and sidechains. Because of this, it largely depends on which blockchain the asset belongs to to determine its
behavior.
For example, stable coins launched on Ethereum have their own smart contracts identified as ERC-20 tokens. All transactions with stable coins on the network are recorded in a public registry, just like transactions with native currencies such as bitcoins or ethers. However, unlike the latter, they do not have their own blockchain.
Stable coins are also tokens issued by a provider, company or management system. These entities are responsible for determining how many tokens are issued, what units they are associated with, and how their reserves are secured. That is, they play an important role in their economy.
Collateral Backed by National Currencies
It is the most popular type of stabel coin on the market because its tokens are directly tied to the national currency at a 1:1 ratio. In other words, each unit of 1 issued token represents one dollar or one euro, for example. Users deposit fiat currency into a bank account and receive one of these tokens in return.
This fact means that the developer of stable coin is responsible for maintaining a number of fiat coins in reserve proportional to the number of tokens in circulation. The reserves are managed by the company, which must deposit them in a bank or specialized financial agency.
Examples of these types of coins include Tether, Paxos Standard or TrueCoin. These stable coins feature a business platform that acts as an intermediary to mine digital dollars in the blockchain and protect the base currencies of its customers.
Secured by Cryptocurrency
Cryptocurrency-backed stable coins are a unique class of digital assets where other cryptocurrencies provide the backing or collateral, even as their value mirrors that of a fiat currency. A prime example of this type of stable coin is DAI.
DAI operates on the principle of smart contracts, representing a form of programmable money. In this system, users deposit Ethereum (ETH) or another cryptocurrency into a contract managed by MakerDAO, the entity behind DAI. This deposit enables the creation of DAI tokens. However, unlike ETH or other cryptocurrencies used as collateral, the value of DAI is pegged to the U.S. dollar, not the fluctuating value of the crypto assets.
The generation of DAI is completely dependent on smart contracts, eliminating the need for third-party trust. This is because it doesn't rely on physical reserves but rather on the digital contract's parameters. Users lock their ETH in the contract, which then facilitates the minting of DAI tokens. If users wish to retrieve their original deposit, they can simply return the DAI tokens to regain their ETH.
Commodity-Backed Stablecoins
Much like their fiat-linked counterparts, commodity-backed stable coins are digital tokens whose value is secured by tangible, exchangeable assets, typically precious metals.
Gold is the most prevalent commodity used for backing these types of stable coins. However, there are also stable coins underpinned by other valuable commodities such as oil, real estate, and various rare metals. Pax Gold (PAXG) stands out as a notable example in this category, representing a stable coin with its value anchored in gold reserves.
Understanding USDT (Tether)
Tether (USDT) is a stable coin that is directly pegged to the US dollar, maintaining a 1:1 exchange rate, meaning 1 USDT is always valued at 1 USD. This parity allows users to spend, transfer, or exchange USDT with the same ease as traditional fiat currency.
USDT was developed with specific objectives in mind:
- To enable easier transfers in local currency equivalents.
- To provide a more stable alternative to Bitcoin.
- To offer a means for users to verify transactions.
Ranked as the third-largest cryptocurrency globally, Tether is not without its controversies, especially regarding its constant dollar value. Despite these debates, USDT remains a popular choice in the crypto market due to its stability and utility.
Binance Coin (BNB)
Binance Coin (BNB) is the proprietary cryptocurrency token of the Binance exchange, one of the world's leading cryptocurrency exchanges. Launched in 2017, just 11 days before the official launch of the Binance exchange platform, BNB's initial role was to fund the establishment of the exchange itself.
The brainchild of Changpeng Zhao, a well-known figure in the cryptocurrency community, Binance quickly rose to prominence under his guidance. Zhao's influence in the crypto world is so significant that he's recognized by prominent publications like Forbes and Bloomberg as one of the wealthiest individuals in the cryptocurrency sector.
BNB initially operated on the Ethereum blockchain as an ERC-20 token. However, in 2019, Binance transitioned to its own blockchain network, the Binance Chain. This move to a fully decentralized blockchain system underscored the currency's commitment to immutability and independence.
One notable characteristic of the Binance Chain, and by extension BNB, is the practice of periodically "burning" tokens. This action is undertaken every quarter and is aimed at reducing the overall supply of BNB in circulation. The objective of this deflationary strategy is to enhance the scarcity and potential value of the remaining BNB tokens.
Comparing USDT and BNB: Stability vs. Volatility
The contrast between USDT (Tether) and BNB (Binance Coin) highlights the fundamental differences in cryptocurrency types, particularly in terms of stability and volatility.
USDT, as a stable coin, is designed to maintain a consistent value, with 1 USDT always equaling 1 USD. This consistency is key to its appeal, providing a sense of security and stability in a market known for its fluctuations.
In contrast, BNB, despite its strong reputation and popularity, exhibits a higher level of volatility. This is a common trait among non-stable coins. A significant aspect of BNB's strategy involves Binance periodically buying back and "burning" a portion of the BNB tokens. This process intentionally limits the number of BNB tokens in circulation, potentially leading to price fluctuations as the supply changes.
For those who have confidence in the Binance ecosystem and are comfortable with some level of risk, investing in BNB could be a sound decision. However, for those seeking stability and minimal exposure to market volatility, a stable coin like USDT would be a more suitable choice.