A stable coin is a type of cryptocurrency whose value is tied to an outside asset, such as the US dollar or gold, to stabilize the price. Stable coins try to tackle price fluctuations by tying the value of cryptocurrencies to other more stable assets – usually fiat. Fiat is the government-issued currency we’re all used to using on a day-to-day basis, such dollars and euros, and it tends to stay stable over time.
Usually the entity behind the stable coin will set up a “reserve” where it securely stores the asset backing the stable coin – for example, $1 million in an old-fashioned bank (the kind with branches and tellers and ATMs in the lobby) to back up one million units of the stable coin.
This is how a digital stable coin and a real-world asset are tied together. The money in the reserve serves as “collateral” for the stable coin. A user can theoretically redeem one unit of a stable coin for one unit of the asset that backs it.
There is a more complex type of stable coin that is collateralized by other cryptocurrencies rather than fiat yet still is engineered to track a mainstream asset like the dollar.
Using this framework, stable coins come in a range of flavours, and the collateralized stable coins use a variety of types of assets as backing:
USD Tether is a product by Tether limited founded by CEO JL Van de Velde who is also the CEO of Bitfinex Exchange. Established in July 2014, Bitfinex limited released the dollar-backed Tether stable coin in January 2015. It operates a centralized custodial holding of fiat currency.
USD Coin is the second-largest stable coin by market cap, valued at $2.5 billion, it is regarded as the fastest-growing fully reserved digital dollar coins. USDC transfers move at the speed of the internet and can be exchanged in the same way, it incurs cheap transaction rates and offers the security of crypto-systems. USDC is an ERC 20 token, centralized and held by a Consortium; Coinbase and Circle backed by Goldman Sachs. It issues or burns tokens whenever there is a deposit or redemption.
USDT and USDC are centralized stable coins. This means that assets on these platforms are controlled by the issuing company or a given group of individuals. Because of this feature, a very critical aspect of the need for holding value in cryptocurrencies is being compromised by both coins, individual accounts can be frozen by the underlying companies when the need arises.
USDC is maintained by Circle Limited. Circle issues a monthly audit report publicly to support its fully backed US dollar claim. It does not have any minimum or maximum redemption limits when redeemed via the Coinbase platform. It can be purchased, using a credit card or debit card. As an ERC20 token, it can easily be stored in a cold storage personal hardware wallet. Competitive APR rates. Several decentralized platforms allow flexible USD Coin (USDC) interest accounts, for example, Compound and Nuo Network.
USDC is not available on all Crypto Exchanges, it is less established, smaller market cap compared to USDT and is heavily centralized. In order to redeem USDC for fiat, users must undergo KYC and provide identity documentation to Circle, Ltd.
It is currently available on many blockchains such as Ethereum, OMNI, Algorand, Tron.
Well established with a huge market cap. Fast transaction time, except for the current bloated Ethereum network. Flexible lock-up terms and competitive APR rates.
Has never allowed the completion of an audit or publicly released audit reports.
This tends to support the speculation that Tether holds only 76% of the fiat of its investors.
Hence per dollar pair may default. Users are allowed to carry out only one fiat redemption weekly. A verification fee is charged prior to purchase or redemption of USDT with/for fiat.
Tether maintains a $100,000 minimum issuance and redemption limit on its platforms. Decentralized interest account providers do not support Tether.