Stablecoins 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 stablecoins 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 stablecoins. 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 Stablecoins Work?
Stablecoins 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, stablecoins 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.
Stablecoins 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.
Despite the diversity of the stabelcoin market, four main categories can be identified that determine the performance of these tokens in relation to how they are tied to the value of other assets.
Collateral in National Currencies
It is the most popular type of stabelcoin 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 stablecoin 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.
Collateralized Cryptocurrencies
Secured cryptocurrency stacks are those in which other crypto assets serve as collateral for the token, even though they reflect the price of the fiat currency. To understand how these stable cryptocurrencies work, it’s easier to think of one such as DAI.
DAI is a stabelcoin that works through a smart contract. That is, it is programmable money. Users can deposit ETH or another crypto-asset into the contract of MakerDAO, the company that creates DAI, to guarantee the creation of a new token. In doing so, the price of the asset will not copy the ETH, but the U.S. dollar to which it is pegged.
The issuance of these assets also depends solely on a smart contract, which makes their existence possible. In other words, the need to trust a third party is minimized because there are no physical reserves to manage. Users simply fix their ETH in the contract, and the contract supports the creation of the token, whereas if they want their money back, they simply need to deposit the token and claim their ETH.
Maintained in Raw Materials
Similar to fiat-linked steblecoins, commodity-backed tokens are tokens whose issuance is guaranteed by other exchangeable assets that can be physically backed up, such as precious metals.
The most widely used commodity to create these stablecoins is gold, although there are also currencies backed by oil, real estate, and other rare metals. Pax Gold (PAXG) is one of the most well-known stable coins in this market.
What is USDT?
Tether(USDT) is a stabelcoin pegged to the value of the dollar with an exchange rate of 1:1. That is, 1 USD is equivalent to 1 USD. Buyers can spend, transfer, or exchange USDT just like regular fiat currency.
USDT was originally created to solve the following problems:
- Facilitate transfers in local currency.
- Offer a more stable version of Bitcoin
- Provide users with a way to verify
Tether is the third largest cryptocurrency in the world. While there is some controversy over the stability of Tether at $1, there are still many reasons to choose this coin.
What is Binance Coin?
Binance Coin (BNB), is the Binance exchange’s own native token, BNB was launched in 2017 – about 11 days before the Binance exchange – and its original purpose was none other than to finance the creation of a cryptocurrency exchange. Binance, founded by Changpeng Zhao, a cryptocurrency enthusiast since the early days of bitcoins, is now the largest exchange in the world, and Zhao is considered the world’s top “crypto-billionaire” – sources such as Forbes and Bloomberg include Zhao among the 20 richest people in the world.
At first, the Ethereum blockchain was used using ERC-20 tokens, but since 2019, when Binance launched its own blockchain (Binance Chain), everything has been transferred to the new blockchain, which is fully decentralized, ensuring its immutability.
A feature of the BNB Smart Chain blockchain is the quarterly burning of tokens. The goal of this practice is to create a deflationary model in which the number of tokens in circulation decreases.
USDT vs BNB
Despite its popularity and reputation, BNB remains a volatile asset, unlike USDT. This is due to the fact that USDT is a stable coin, so 1 USDT must equal 1 USD.
It is also known that Binance destroys BNB tokens by buying back some of them and then destroying them. The idea is that this limits the supply of BNB, which can lead to price fluctuations.
Consequently, BNB will be a more volatile token. However, if you trust the Binance ecosystem, BNB might be your best bet. If you want to avoid worrying about price fluctuations, it is better to opt for a stable coin, such as Tether (USDT).
