What are Stablecoins?
Cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH) have a reputation of being highly volatile regarding their values against traditional FIAT currencies such as USD, EUR, GBP etc as well as against other digital assets.
As crypto increases in adoption, and the related technologies mature, then the volatility in relative values should reduce. Meanwhile Stablecoins attempt to provide a mechanism of improving stability whilst leveraging the benefits of digital currencies e.g. security, low cost transactions, and the ability to use these new technological solutions.
A stablecoin is a class of cryptocurrencies that attempt to offer price stability and are backed by a reserve asset. Stablecoins have gained traction as they attempt to offer the best of both worlds—the instant processing and security or privacy of payments of cryptocurrencies, and the volatility-free stable valuations of fiat currencies.
investopedia.com
Examples of Stablecoins
Below are the top 5 Stablecoins by Market Cap:
- Tether (USDT) – issued by Tether out of Hong Kong and is pegged to the USD by the company owning equal amounts of cash reserves or equivalent assets to coins minted. Tether works on the Algorand, Bitcoin, Bitcoin Cash, EOS, Ethereum, OMG & Tron blockchains.
- USD Coin (USDC) – issued by the Centre Consortium which comprises of Circle (payment services) & Coinbase (crypto exchange). USDC is fully backed by cash, cash equivalents, and short-duration U.S. Treasuries ensuring that it remains redeemable 1:1 for USD.
- Binance USD (BUSD) – a 1:1 USD-backed Stablecoin approved by the New York State Department of Financial Services (NYDFS). BUSD is a partnership between Binance (crypto exchange) and Paxos (custodians of USD cash equivalent to BUSD issued). This Stablecoin works on the Ethereum (ERC-20) and Binance (BEP-2) blockchains.
- Dai (DAI) – an Ethereum-based Stablecoin that is ‘soft-pegged’ to the USD by a mix of cryptocurrencies that are held in Smart Contract vaults. The issuing organization, MakerDAO, is managed by holders of Maker (MKR) governance tokens.
- TerraUSD (UST) – a decentralized scalable Stablecoin that has its own blockchain and is targeted for use on DeFi protocols and their dApps. Its value is pegged to the USD and secured by Terra (LUNA) as an asset reserve by burning $1 of LUNA for each UST minted.
How do Stablecoins work?
Aside from Stablecoins being pegged to a FIAT currencies, such as the dollar to help mitigate crypto volatility, this form of cryptocurrency has a number of other uses:
Reduce Transfer Fees
Performing international transfers of traditional FIAT currencies tend to be expensive due to transaction fees and/or poor exchange rates if converted into a different currency e.g. USD to EUR. If US dollars are deposited onto a crypto exchange and used to buy a Stablecoin on a 1:1 ratio (e.g. USDT) then the resulting cryptocurrency can be moved internationally or to another exchange at a greatly reduced cost.
Earning Interest
Holding FIAT currency in a traditional bank often earns interest, if at all, that is at a rate less than inflation resulting in the funds actually going down in real term value. Depositing money onto a service such as BlockFi or Voyager allows that money to be converted into Stablecoins which then earn interest at rates that can be as high as 10% APY yet do not have the volatility of other cryptocurrencies such as BTC or ETH.
Staking & Yield Farming
As with almost all cryptocurrencies Stablecoins can be invested to earn interest. These mechanisms are Staking, Yield Farming or participating in a Staking Pool. In order to do this usually requires the tokens to be locked up for a certain period of time and may have minimum quantity requirements. It may also be necessary to lock up cryptocurrency pairs with equal quantities of each token.
Below are explanations of each of these investment methods together with examples using our Top 5 Stablecoins:
Staking
Participation in a Proof of Stake (PoS) system to put your tokens in to serve as a validator to the blockchain and receive rewards.
coinmarketcap.com
- Tether (USDT):
- 4.79% APY interest on Binance.
- 8.25% APY interest on BlockFi.
- 8.75% APY interest on Swissborg.
- USD Coin (USDC):
- 2.79% APY interest on Binance.
- 0.15% APY interest on Coinbase.
- 8.75% APY interest on Swissborg.
- Binance USD (BUSD):
- 2.92% APY interest on Aave.
- 2.89% APY interest on Binance.
- 8.25% APY interest on BlockFi.
- Dai (DAI):
- 8.79% APY interest on Binance.
- 8.25% APY interest on BlockFi.
- 2.00% APY interest on Coinbase.
- TerraUSD (UST):
- 19.51% APY interest on Anchor.
Staking Pool
Staking Pools allows users to combine their resources in order to increase their chances of earning rewards. This mechanism offers more staking power to the network to verify and validate new blocks.
coinmarketcap.com
- Tether (USDT):
- Up to 54% APY on Mars Masters.
- 14.74% APY interest on Nerve.
- USD Coin (USDC):
- 2.5% APY on dYdX Foundation.
- 14.74% APY interest on Nerve.
- Binance USD (BUSD):
- Up to 48% APY on Mars Masters.
- 14.74% APY interest on Nerve.
- Dai (DAI):
- N/A
- TerraUSD (UST):
- 14.74% APY interest on Nerve.
Yield Farming
Yield Farming involves earning interest by investing crypto in decentralized finance markets.
coinmarketcap.com
- Tether (USDT):
- 14.67% APY interest on Curve.
- 14.85% APY interest on SushiSwap.
- 15.16% APY interest on Venus.
- USD Coin (USDC):
- 9.40% APY interest on Harvest.
- 62.47% APY interest on Swerve.
- 12.08% APY interest on Venus.
- Binance USD (BUSD):
- 7.25% APY interest on Curve.
- 3.46% APY interest on Fortube.
- 161.41% APY interest on PerlinX.
- Dai (DAI):
- 50985.47% APY interest on PancakeSwap.
- 142.04% APY interest on PerlinX.
- 5.26% APY interest on SushiSwap.
- TerraUSD (UST):
- N/A
Are Stablecoins secure?
In this section we look at the two key areas of potential vulnerabilities with Stablecoins:
Exchanges
Whilst most cryptocurrencies are decentralized many Stablecoins are centralized. This means that their underlying assets or collateral are usually held in one place as is their mechanism for minting new coins. This opens up the potential for hacks into a CEX (Centralized Exchange) leading to compromises of the Stablecoin itself either through minting extra coins and therefore diluting the supply in circulation or even theft of the underlying asset(s) that enable the Stablecoin to be pegged to a FIAT currency.
Wallets
Stablecoins are no different to any other cryptocurrency in that the most vulnerable part is where human interactions are involved e.g. use of a Digital Wallet, having strong enough passwords, avoiding clicking on links in phishing emails, safe storage of Crypto Wallet Seeds, use of secure internet connections to carry out transactions – for further details on these and more please check out our previous article Keeping your Digital Currency safe using Crypto Wallets.
Examples of Past Exploits
Below are some examples of exploits involving Stablecoins:
- $300k of Tether (USDT) frozen after hack (Feb 2020):
- This breach occurred whilst transferring the Stablecoins from Binance to a personal wallet whereby the funds were once again transferred to another address. The problem was due to the private key being stored in the note-taking app Evernote.
- $371k of USDC stolen in Opyn attack (Aug 2020):
- DeFi risk-management platform Opyn was hacked via a “double-exercise” attack. A bug in the oETH (Opyn ETH token) smart contract code was taken advantage of allowing the attacker to extract multiple payments of USDC by selling only 1 batch of ETH.
- $11m Flash Loan attack on bEarn DeFi Protocol (May 2021):
- bEarn is a yield farming protocol that is Binance Smart Chain (BSC) based. An incident occurred that resulted in the bVault BUSD Alpaca strategy being drained of coins. The exploit was due to incorrect implementation of a withdraw() function that impacted the Smart Contract.
- $20m exploit of Pickle Finance DeFi Protocol (Nov 2020):
- $19.7m of the DAI Stablecoin was stolen when the yield aggregation service was targeted and a hacker drained a particular ‘jar’ that harvests yields from DAI deposits.
Further Information
- Stablecoin on Investopedia
- Stablecoin on Wikipedia
- Stablecoins by Market Capitalization on CoinGecko
Have you ever lost any Stablecoins following a hack of an Exchange or a Digital Wallet? If so please comment below with details to share with our readers.