What makes stablecoin so popular ?

​ Stablecoin is the digital currency that has a fixed price which is usually the price of one dollar. Before the stablecoin existed, Traders would have to send their crypto. Usually BTC to payment gateway whenever they wanted to take out their profits or cut their losses.

Moving between crypto and fiat always incurs a lot of fees, furthermore. A busy blockchain, in other words. A delay of some of your transactions, could lead to the loss of some of your gains or deepen your losses due to the cryptocurrencies volatile prices

As a solution, stablecoin makes it possible to cash out your money without having to convert your cryptocurrency into fiat. Furthermore, trading against stablecoin makes it much easier to calculate your gains or losses. This is why stablecoins are so popular.

What are the types of stablecoins and who are behind the three largest stablecoins?

Types

Generally speaking, there are three types of stablecoins: - Fiat backed - Crypto backed - Algorithmic

First largest stablecoin

USDT is the largest stablecoin in the crypto market, Tether issued the USDT coin. Tether is based in Hong Kong and it is closely affiliated with Bitfinex, a Hong Kong based cryptocurrency exchange.

Technical gibberish

Tether issued first the USDT coin in 2014, and they build it on the top of the Bitcoin using Omni layer protocol. Nowadays, 50 % of the USDT coins exists on Ethereum Blockchain as an ERC20 token.

Tether makes money from USDT thanks to the fees, They charge 0.1% for all fiat deposits and withdraws. Also, users should pay a non refundable 150$ for QYC verification, which is necessary to mint or redeem USDT.

Second largest stablecoin

USDC is the second largest stablecoin, which was initially issued on September 2018 by Center consortium.

Center consortium is nothing else than a partnership between Circle, the peer to peer payment company based in Boston Massachusetts, United states and Coinbase, one of the top cryptocurrency exchanges in the U.S.

id="block-c637fcec-fcda-48f7-aeeb-7a2d6dfc7914">Technical gibberish

USDC is primarily an ERC-20 token, where Ethereum is the blockchain where most of the USDC coin circulate. Algorand, Solano, Tron and Stellar Blockchains maintain USDC as well.

If you ask about from where Circle makes most of its money? the answer is from payment made using USDC.

Since Center consortium had a recent partnership with VISA network.

Third largest stablecoin

BUSD is the third largest circulating stablecoin in the cryptomarket, Paxos was behind this coin. A large U.S company based in New York.

Actually, BUSD is the product of the partnership between Paxos and Binance. Where Binance is the World's Leading Blockchain Ecosystem and Digital Asset Exchange.

BUSD exists on Ethereum, the Binance chain and the Binance smart chain.

How stablecoin maintains its price to 1$

The trick that all stablecoins use behind maintaining their price to 1$ is to adjust their supply based on demand.

Actually the price of a stablecoin can go above a dollar, when the crypto market crash. More precisely, It happens when everyone rush to protect their portfolios from further losses by selling their cryptos in returns of a stablecoin. Which causes a high demand for buying the stablecoin.

Conversely, when people start selling their stablecoins, to buy whichever crypto that is going to the moon. This sometimes pushes the price of the stablecoin bellow a dollar. When this happens, The stablecoin is burned to reduce the supply and increase the price to reach 1$

What would happen if everyone would need to cash out digital dollars to physical dollars?

Black swan event

In theory, The companies which issue the Fiat stablecoin generally claim that they have the equivalent amount of dollars in the bank to back the tokens in circulation across all cryptocurrencies's Blockchains.

When the fiat stablecoins are minted, this means that someone went to the company behind that stablecoin and gave them dollar in exchange of tokens which are then put into circulation.

When the fiat stablecoins are burned, this means that someone went to the company behind that stablecoin and gave them tokens in exchange for dollars, Which than take those dollars out of circulation.

This ration 1:1 of dollars to the token is extremely important because if there was ever a black swan event, which means everyone want to cash out their cryptocurrencies in exchange of dollars.

Not having a sufficient amounts of dollars in the bank, means not everyone would be able to convert their digital dollars into physical dollars.

Funny money!

There was a huge lack of transparency regarding whether the company behind those digital dollars, have a physical dollar backed in the bank or they have nothing more than a funny money.

The three largest stablecoins issuers have all recently reveals these details, which means we can finally find out which of those stablecoins are legit!

Revealed details about each stablecoin reserve

Tether, revealed its reserve this year as part of its agreement with the New York department of justice. According to Tether, the USDT in circulation is backed by the following assets:

Circle also revealed its reserve behind the USDC which is as the following:

61% cash and equivalents

13% of Yankee certificate of deposits (CDs)

12% US Treasuries

9% commercial paper

5% corporate bonds

0.2% Municipal bonds

At the end, there is Paxos which claims that it's stablecoin in circulation are backed by 96% of cash and cash equivalent and only 4% being backed by US Treasury bills.

96% of cash and cash equivalent

4% U.S Treasury bills

Why so much debt held by the stablecoin companies?

The answer is Interest, Let's take Tether and Circle reserve, which is nothing more than a debt in some kind in the form of a loan to public or private institutions.

Tether and Circle, give money to those institutions in exchange of bonds or certificate because they earn interest. If you probably know that all your customers won't come at once to ask to get their money back same time, lending money to those institutions is a deal to earn interest on that cash.

Final topic

This brings us to the final topic, about which of these stablecoin backing is the best?

If we start with Tether, the largest stablecoin issuer company. Their reserve chart recently revealed was posted without any oversight of any accounting or auditing firm.

While Paxos and Circle do provide attestations of their reserves on a monthly basis, which is not quite convincing since an attestation is nothing more than a verification from a third party based on the information shown to them. While an audit is when the third parties goes digging all the paperwork to see what's not being shown to them.

With that being said. In fact, Paxos does get audited from time to time because it is a trusted company regulated by the New York state Department of financial services or NYDFS. Trust company means that Paxos can only hold assets that are in the safest forms in order to assure to their users that dollars are immediately available when they want them back.

This is the big difference between Paxos and other two major companies.

This means that users who hold BUSD can know for sure that they can cash out even if the crypto market is collapsing.

On the other hand, Almost 60% of Tether reserve are commercial paper that stands on the opposite end of safety spectrum, Which means that their reserve depends literally on the corporate these commercial paper came from.

The origin of Circle's commercial paper is also unknown, beside their other assets that are not nearly as liquid as cash equivalent.

Conclusion

In a case of any event when the financial market crashes across the board, Tether and Circle could be 10 to 20% short of dollars it needs for its customers to cash out in a timely manner. While Paxos won't.

As a conclusion, regulators have the reason to feel concerned! Since if there would be a huge sell pressure of stablecoins which have no physical dollars behind, And if those dollars were already invested in the regular market such as the housing market with home equities, This would crash the housing market and bring the stock market down with it.

This might be a risk sooner, if we consider the fiat stablecoin companies growing rate.