Stablecoins (part 1/2)
You are not familiar with crypto, but you would like to dabble in it? There are a variety of ways to invest in cryptocurrencies. Several strategies exist in which you can apply to secure your gains while the market becomes shaky. There are also lower risk investments with returns far better than money in a traditional bank savings account.
In the coming weeks, we are going to publish a series of articles geared towards users who would like to enter the crypto world with a low risk approach, but still looking for a better return than holding in a savings account. We will help you understand some key definitions, guide you to transfer money from a bank account into the crypto space, and teach you how to invest the crypto equivalent of US dollars on Oh! Finance.
“Oh! Finance is an optimized yield-generation protocol, focused on reducing risk and increasing volume exposure. Start earning industry-leading interest rates on stablecoins in just a few clicks”. You didn’t quite understand what it means? Stay tuned for the series of articles coming out!
What is a stablecoin?
A stablecoin is a cryptocurrency type pegged to a non-crypto asset, like fiat currencies such as the US dollar or Euro, or a physical asset like precious metals (gold or silver), as to stabilize its price.
Cryptocurrencies are notorious for their volatility (think Bitcoin) and stablecoins are playing an essential role in the crypto space:
- Since they are stable by being linked to the US dollar for example, they vary very little in value
- They can be used in trades like any other crypto asset
- They allow traders to temporarily park their profits after selling a crypto asset before moving on to their next trade
- During so-called bear cycles, “hodlers” can park their gains made during a previous bull run, waiting for the right moment to jump back in the game for the next bull run
- Some stablecoins can be transferred quickly between custodians: Essential for trading when wanting to arb between DEXs and/or CEX
- Much easier to integrate the use of stablecoins on crypto trading platforms than fiat money
Crypto assets are often paired with a stablecoin for trading on centralized exchanges (= CEX), but pairing with BTC or ETH, etc, are very common as well. On decentralized exchanges (= DEX), any asset can be traded to any other one thanks to the automated market makers (= AMM), stablecoins are usually an essential piece in the general liquidity of a DEX.
How does a stablecoin tie its value to a non-crypto asset? There are different types:
- Collateralized to a real word reserve of assets (example: USD locked away in a bank). Can be fiat, mixed with other corporate assets.
- Collateralized to other cryptocurrencies. A stablecoin issuer allows users to lend their crypto assets as collateral and can borrow the minted stablecoin in return
- Algorithmic stablecoin: Not collateralized, but using a mint and burn mechanism to regulate supply to keep the coin’s value in line with a target price (one of the possible parameters to keep price in check). When the price goes down, a part of the circulating supply is burned to reduce supply and thus creating artificially more scarcity (and so raises the demand, which raises the price). When the price goes up, new tokensare minted to raise the supply and reduce scarcity pressure. That’s similar to a non crypto market where the prices of goods are regulated by supply and demand.
Popular stablecoins
Tether (USDT):
- Launched in 2014, one of the oldest and the most popular
- Collateralized by a mix of non crypto assets
- Market cap: $69,710,372,338
USD Coin (USDC):
- Launched in 2018, second most popular
- Collateralized by a mix of non crypto assets, like USDT
- Market cap: $31,213,922,883
DAI:
- Launched in 2015 on the Ethereum blockchain
- Collateralized to other cryptocurrencies
- Market cap: $6,201,086,651
UST:
- Launched in 2020 on the Terra blockchain
- Algorithmic stablecoin
- Market cap: $2,673,859,989
Potential drawbacks associated with stablecoins
For collateralized stablecoins, the most common uncertainty is if the collaterals really cover the equivalent value in the crypto space. If there is an equivalent to a bank run on the crypto side on such a stablecoin type, will there be enough collateral to cover it.
For algorithmic stablecoins, the mechanism implemented by the stablecoin issuer to regulate the price could not be effective in all market conditions.
Difference between USDC — USDC.e
The difference (and similarities!) between USDC and USDC.e will be explained in part 2.
Terminology
AMM: Automated Market Maker. Protocol used by a DEX that relies on a pricing algorithm to automatically determine the assets’ price at the moment of a trade
Arbing: A form of trading, where traders take advantage of price differences of a crypto asset between trading platforms (CEX and/or DEX)
CEX: Centralized Exchange (like Binance, Coinbase, Kucoin, Kraken, etc).
DeFi: Decentralized Finance. Trading without traditional regulations imposed by official entities.
DEX: Decentralized Exchange (like Uniswap on the Ethereum chain or Trader Joe on the Avalanche chain)
Hodler: Someone who invests long term in a crypto asset, waiting for it to gain in price before selling, doesn’t really trade a same asset during its price fluctuation (“sell high”, “buy low”)
Liquidity: Amount of assets deposited in a DEX by the liquidity providers.
Mint/burn:
- Minting a token/coin means generating the token/coin once certain operations are executed (via smart contract interaction). Equivalent to printing a bank note
- Burning a token/coin: Destroying it/taking it out of circulation. Equivalent to destroying a bank note.
USDC: USD Coin emitted by a joint venture between Circle and Coinbase through the Centre Consortium
USDC.e: wrapped USDC on the Avalanche blockchain. USDC transferred by the Avalanche Bridge from Ethereum to Avalanche
USDT: Stable coin emitted by Tether Limited
About OH! Finance
Oh! Finance is an optimized yield-generation protocol, focused on reducing risk and increasing volume exposure. Start earning industry-leading interest rates on stablecoins in just a few clicks: https://oh.finance
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