What are stablecoins?
Stablecoins are coins whose value is pegged to the value of the dollar or any other traditional currency, as the case may be. They are called stablecoins because they provide stability in such a volatile market as the crypto market.
The role of a stablecoin is to provide an accessible exchange environment on exchanges, providing an equivalent of the dollar on the blockchain. An example of utility is when in a bear market, all cryptocurrencies depreciate heavily, and we can convert them to USDT to stop capital loss. We also use stablecoins to buy cryptocurrencies easily and fast.
Although there have always been speculations about the giant Tether (USDT), until 2022, no one was afraid to use stablecoins freely and in any quantity. But when Terra Luna imploded, the stablecoin TerraUSD (UST) debugged itself from the value of the US dollar, lost its value and set a precedent.
Since then, no one has had the same confidence as before, expecting any stablecoin to decouple at any moment. Something happened in March 2023 when the USDC stablecoin decoupled from the dollar temporarily due to the lack of $3.3 billion locked in Silicon Valley Bank (SVB).
And on June 15, 2023, there was a FUD that even Tether (USDT) had decoupled, although the price difference was minuscule compared to the USDC decouple and only lasted a few hours.
Why are stablecoins no longer stable in 2023?
There is a lot of fear in the market right now because there is no telling where the next catastrophe may come from (like Terra Luna and FTX). US regulators are not only attacking the crypto market and cryptocurrency exchanges, but they have a problem with stablecoins because they compete with the digital dollar directly.
Anyone in the crypto space is questioning the stability of stablecoins. The tragedy is that in a bear market where the value of cryptocurrencies is falling, we can no longer find refuge even in stablecoins. Someone is trying to shake us out of the crypto market.
The problem is that most of these stablecoins depend on the banks, and if the banks have problems, the stablecoins are not safe either. That’s why USDC was in trouble because Silicon Valley Bank collapsed, and if the authorities hadn’t bailed out that bank, USDC might still be out of business today.
In this context, we need to find solutions to prevent losses due to stablecoin decouples, but before we investigate potential solutions, let’s see what stablecoins are accessible today.
Tether is by far the largest and most popular stablecoin. Due to the problems of the other stablecoins, people migrated to USDT, increasing its market cap by almost $20 billion in 2023.
Although there is a lot of FUD about Tether, it is still the most stable of the stablecoins. The prosecutor’s office in New York investigated them for hiding $850 million, and in February 2021, Tether settled with prosecutors, paying a fine of $18 million with a ban on trading in the American state.
However, the USDT token is mainly used on most US and international exchanges.
The only thing the Americans could do to hit Tether was to create negative news in the press, creating enough panic that people would pull their money out of Tether. Suppose enough money is taken out of Tether at once. In that case, an absolute decoupling from the US dollar can be reached because Tether does not hold 1:1 cash reserves but only partially cash plus less liquid assets (bonds and cryptocurrencies).
USD Coin (USDC)
A prominent stablecoin created by the company Circle that, while recovering from its March shutdown, saw its market cap drop from $40 billion to $28 billion (today) as people moved money in Tether, losing faith in USDC.
It is a stablecoin used a lot on DeFi and has tokens on the newest blockchains (Arbitrum). Still, it does not inspire confidence because if it has disconnected once, it can disconnect a second time, and the second time can be fatal.
Second, USDC was created by an American firm, and the US is the spearhead of anti-crypto regulations so that the company can be attacked by the SEC or other regulatory institutions at any time.
This is a stablecoin created by the Maker Dao Foundation. It is an algorithmic stablecoin unlike the above; it works based on smart contracts. The problem with algorithmic stablecoins is that they have a rigid design that can lead to catastrophes. For example, TerraUSD was also an algorithmic stablecoin.
Although it is titled the first decentralized stablecoin, DAI had significant collateral in the USDC currency (which is centralized). In March 2023, it suffered the same decoupling as USDC, reaching $0.88 per unit. Since then, many funds have exited DAI. If in March the market capitalization was $6.4 billion, today it reached $4.5 billion.
It may be a coin that has its uses in specific decentralized applications, but it only offers a little confidence regarding security.
Binance USD (BUSD)
A stablecoin that Binance launched together with Paxos but was attacked by the SEC in February 2023. Paxos, a US company, was legally required to stop issuing BUSD, while significant exchanges such as Coinbase delisted BUSD.
In response, Binance delisted USDC, the primary stablecoin on Coinbase. BUSD is still valid on international Binance, but its volumes have decreased. That’s why Binance encouraged the use of TUSD.
True USD (TUSD)
A stablecoin created by TrustToken, an American company founded in 2017. It boasts that it is not an algorithmic coin but a collateral-based one (like USDT and USDC). Still, unlike Tether, it offers collateral transparency and has 100% coverage, with monthly checks from the auditors.
Binance started using this stablecoin right after BUSD was attacked and even created a promotion where you get zero trading fees on various pairs, including BTC/TUSD. The promotion is still valid today.
TUSD could be a safer alternative than other stablecoins because it is heavily legalized and, at the same time, not as big as USDT and USDC to pose a threat to the FED. But the fact that an American company issues it makes it vulnerable to American regulatory institutions that can easily find it in a hurry.
PAX Dollar (USDP)
Another stablecoin issued by the company Paxos, just like BUSD. But Pax Dollar (USDP) has had different legal problems; on the contrary, it boasts of being perfectly legalized with liquid cash collateral and equivalent cash assets. It is a minor stablecoin but is present on major exchanges and remains an acceptable alternative to USDC and USDT.
Decentralized USD (USDD)
An algorithmic stablecoin launched by Justin Sun through Tron DAO. To prevent the problems of algorithmic stablecoins, USDD has excess collateral, i.e. instead of having 100% reserves it has 169% reserves. In addition, it boasts of having a system (Peg Stability Module) through which you can convert USDD to any major stablecoin (USDT, USDC) without price difference (1:1).
Even though Justin Sun tries to convince us that USDD is immune to a failure similar to TerraUSD, an algorithmic coin is not safe enough even if it has excess collateral.
Gemini Dollar (GUSD)
Created for the Gemini exchange, GUSD is a fully legalized and transparent stablecoin on US territory. The problem is that it is not found on many exchanges.
How do we avoid “depeg”? The solution
If we think about it, there are several possible solutions to avoid a decoupling (depeg) of stablecoins, but each solution has advantages and disadvantages:
- Converting to cryptocurrencies: It’s a valid idea if we want to hold for the long term. Thus, we can convert all the stablecoins we own into the cryptocurrency we want to keep. For example, we exchange USDT for BTC, then transfer the BTC to a safe wallet and stop worrying about whether Tether disconnects or not. The downside comes when we are in a bear market and BTC goes down, and we want to sell, hold USDT and buy later at a lower price.
- Diversification into other stablecoins: We don’t keep all our eggs in one basket. Thus if we have an amount of USDT, we can split it into TUSD, USDP and GUSD, keeping only a part in USDT, mitigating the risk of a decoupling. And if you have the guts to keep USDC as well, at least don’t use DAI with USDC, because if USDC decouples, then DAI decouples automatically.
- Converting to FIAT: Perhaps the safest solution is to convert cryptocurrencies and stablecoins directly into currency. For example, Binance lets you convert to euros or lei, so you can have lei directly in your Binance balance. Read here more about parities in lei (RON). The downside is that you will have to keep the funds on the exchange, which is riskier than the options above, where you can transfer cryptocurrencies to your own wallet. Of course, you can try to send euros or lei to your bank account, but there are banks in our country that turn their noses up and can reject transactions coming from crypto exchanges (read more about crypto-friendly banks here).
Let’s hope no major stablecoin decouples soon, causing market panic and chaos. And in order to protect ourselves, it would be best to combine the above solutions, i.e. to diversify stablecoins a bit, to convert a part to FIAT and to have a hodl of cryptocurrencies in the long term. In this way, we will have an increased degree of resilience in a market full of risks.