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What is a stablecoin? or What is the difference between an ETF and a stablecoin?

  What is a stablecoin?  A stablecoin is literally a stable cryptocurrency.  It therefore responds to one of the biggest problems in the cry...



 What is a stablecoin? 

A stablecoin is literally a stable cryptocurrency. It therefore responds to one of the biggest problems in the cryptocurrency sector: the high volatility of prices. The price of a crypto-currency can vary by 10-20% or even 100-200% in just one day (this is however less and less the case for the most valuable cryptos such as bitcoin ). The operation of a stablecoin is simple. If the price of bitcoin is at $6,000 and you trade 1 bitcoin for dollar-backed stablecoin, then you will have 6,000 units of that stablecoin. If bitcoin goes down to $5,000, you will still have $6,000 in stable coins. Conversely, if bitcoin goes up to $7,000, you would still only hold $6,000 in stablecoins.

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All stablecoins have the same purpose but each has a different mechanism. There are three types of stable coin. The first is fiat-collateralized, i.e. "guaranteed fiat" (fiat is a traditional currency like the dollar and the euro). This model implies that the entity issuing the stablecoin holds a bank account containing the value of the issued tokens in fiat currency. For example, if she puts 1 million dollar-backed coins into circulation, she must have $1 million in a bank account.

The second is crypto-collateralized, a coin backed by another cryptocurrency. To compensate for the volatility, the stablecoin is over-benchmarked. For example, $1,000 worth of bitcoins can be requested to issue $500 worth of stablecoins. Even though bitcoin loses 30% of its value, the stablecoin remains hedged. The third is the non-collateralized, the unsecured. In this case, the stablecoin is backed only by its value through a smart contract (a contract that executes automatically). If the total demand for the stablecoin increases or decreases, then the contract will automatically change the number of coins in circulation to keep the price stable. 







What are the benefits of a stablecoin for the industry?

A crypto-currency whose price is stable reassures many players, starting with institutional investors who are mostly afraid of the risk of volatility (especially sharp declines), especially those located in countries that fear inflation. . Investors are also betting on stablecoins for a short period of time until the market stabilizes again. They don't make a profit but the funds are safe. Same reasoning for retailers, who have almost always refused to accept bitcoin. If stablecoins prove their worth, merchants could therefore be tempted to integrate them into their payment systems.

For their part, cryptocurrency exchanges can add new crypto-fiat pairs and therefore register more revenue. Given that some platforms do not accept the dollar (especially Asians) for lack of agreement with banks for access to currencies , stablecoins are a good alternative means of payment.



What stablecoins exist?

There are many stablecoins, difficult to reference them all. Here are the five most important. Note that all these coins are worth more or less 1 dollar.

StablecoinBusiness Type of stablecoin 
Dai (DAI)MakerDAO (USA)Crypto-collateralized
Haven (HAV)Haveven (Australia)Crypto-collateralized
Tether (USDT)Bitfinex (Hong Kong)Fiat-collateralized
TrueUSD (TUSD)TrueCoin (USA)Fiat-collateralized
USDC(USDC)Circle and Coinbase (USA)Fiat-collateralized

Also note the project initiated by Facebook, the diem (ex-libra) , which should see the light of day in 2021. In addition to a diem backed by a basket of currencies, there will be several diems: a diemUSD, a diemEUR, one diemGBP and one diemSGD. 



Are there euro stablecoins?

The majority of stablecoins are in dollars, as shown in the table above. One of the first euro stablecoins is the one from the Casino group. Launched in March 2021, it was baptized Lugh, in reference to a Gallic deity. It is also the name of the company (owned by the Casino group) behind the project. The stablecoin is only available at the French broker Coinhouse, which charges a commission of 1.49%. The other digital asset service providers (PSAN) regulated by the AMF will be able to offer it thereafter, as will foreign platforms "but each will have to demonstrate a high level of compliance", is it indicated in an article of the 21 Million NewsletterWithin one to two years, the Lugh will be a means of payment and loyalty. Behind this ambitious project, big players like Societe Generale, which maintains the account, and the audit firm PwC, which will publish certificates every month to certify the content of the reserve in euros. It should also be noted that this stablecoin is not based on the Ethereum blockchain but Tezos, of which a large part of the teams are French.

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What are the criticisms made of the stablecoin?

First of all, most old stablecoin projects have failed. Ethereum co-founder Vitalik Buterin researched the subject a few years ago , without success. The most often cited criticism is the lack of decentralization, since the stablecoin depends on an entity. Some members of the crypto community also believe that these types of assets add volatility to the crypto world because they call for more speculation.

Finally, the best-known stablecoin, Tether, has been the subject of several controversies. Its parent company Bitfinex is accused by the community of not holding the dollar equivalent of the 2.2 billion Tether issued and has never provided evidence to the contrary. At the end of January, the company even announced the end of its collaboration with the audit firm Friedman. Finally, a recent study by researchers at the University of Texas claims that the price of bitcoin was manipulated by Tether between March 2017 and 2018. The authors observed that when the price of bitcoin fell, there were massive redemptions made in Tether.



What is the difference between an ETF and a stablecoin?

An exchange traded fund (ETF) is a financial product that replicates the variations of an index. Bitcoin ETFs allow investors to speculate on the cryptocurrency star without buying it outright. Since they are exchange-listed , they can be traded instantly during a session, and brokerage commissions are low. They also make it possible to avoid the risks inherent in the possession of crypto-currencies such as theft, closure of a platform, etc. On the other hand, if the issuer of the ETF on bitcoin goes bankrupt, the investor loses his stake. 

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