Metaroids

    Subscribe to the Metaverse Newsletter

    Join me as we build a network of metaverse and web3 pioneers.

    What's Hot

    AI Art Legalities: A Comprehensive Guide to the Commercial Use of AI-Generated Images

    March 23, 2023

    How to Create Better Full-Body Images in Midjourney

    March 20, 2023

    GPT-4 vs. GPT-3: 8 Reasons Why GPT-4 Far Surpasses Its Predecessors

    March 20, 2023
    Twitter
    Metaroids
    • Home
    • News

      Midjourney V5 is Here: 3 Things You Need to Know

      March 16, 2023

      Elon Musk Assembles Team to Build an Open ChatGPT

      February 28, 2023

      Leaked: Tencent Has New Team Working on ChatGPT Rival

      February 27, 2023

      Opera Partners with OpenAI to Launch AI Features in its Browser

      February 27, 2023

      Meta Introduces LLaMA: A New Language Model to Rival GPT, PaLM, & LaMDA

      February 25, 2023
    • Learn

      AI Art Legalities: A Comprehensive Guide to the Commercial Use of AI-Generated Images

      March 23, 2023

      How to Create Better Full-Body Images in Midjourney

      March 20, 2023

      How to Detect ChatGPT-Generated Text

      March 16, 2023

      How to Make Money Selling Prompts for AI Art Generators

      March 16, 2023

      Become a Top AI Art Seller: 4 Ways to Make Money Selling AI Art

      March 16, 2023
    • Others
      1. Feature
      2. Press Release
      3. Opinion
      4. Lists
      5. Review
      6. View All

      GPT-4 vs. GPT-3: 8 Reasons Why GPT-4 Far Surpasses Its Predecessors

      March 20, 2023

      ChatGPT: How AI Can Potentially Impact the World’s Religions

      January 27, 2023

      Humans’ Quest to Decode Animal Languages Through AI

      January 25, 2023

      ChatGPT + Wolfram Alpha: A Super Powerful Assistant

      January 22, 2023

      Hyped NFT Trippin’ Ape Tribe to Launch on Solana in Mid-Late May

      May 6, 2022

      ChatGPT Plus: Is It Worth It & Other FAQs

      February 16, 2023

      Microsoft’s VALL-E May Trigger an Avalanche of Cyber Crimes

      January 18, 2023

      Why Web3 Gaming is Failing & How to Turn the Tide

      December 23, 2022

      Can the Metaverse Work Without Blockchain?

      August 17, 2022

      Midjourney Art Styles GigaPack: FREE 200 Prompt Keywords

      March 17, 2023

      9 Mind-Blowing Ways People Are Utilizing GPT-4 Today

      March 17, 2023

      Best AI Content Detectors of 2023

      March 16, 2023

      16 Innovative Use Cases of AI-Generated Art in 2023 (w/ Examples)

      March 2, 2023

      You.com: A Comprehensive Review of the Search Engine Powered by AI

      February 27, 2023

      AI Art Legalities: A Comprehensive Guide to the Commercial Use of AI-Generated Images

      March 23, 2023

      How to Create Better Full-Body Images in Midjourney

      March 20, 2023

      GPT-4 vs. GPT-3: 8 Reasons Why GPT-4 Far Surpasses Its Predecessors

      March 20, 2023

      Midjourney Art Styles GigaPack: FREE 200 Prompt Keywords

      March 17, 2023
    • Contact
    Twitter Discord LinkedIn
    Metaroids
    Home » Are Stablecoins Safe to Use? The Truth
    stable rocks balanced
    How safe are stablecoins to use?
    Feature

    Are Stablecoins Safe to Use? The Truth

    By Evan EzquerJanuary 14, 2021Updated:January 26, 2023No Comments7 Mins Read
    Share
    Facebook Twitter LinkedIn Email Reddit Telegram

    Stablecoins are called the “holy grail of crypto”. Over $60 billion worth of stablecoins is traded each day!

    But the fact of the matter is, that the most popular stablecoin, Tether, hasn’t really been the most transparent currency in crypto. In fact, there is a growing possibility that Tether might crash spectacularly one of these days.

    This has been going on for quite a while.

    It makes you wonder…

    ..are stablecoins safe for storing funds?

    Not exactly. But we work with what we’ve got. Because what’s the alternative?

    Bitcoin is too volatile to use as a trading pair. National currencies are still not fully supported by most exchanges.

    The safest bet would be to go with regulated fiat-backed stablecoins like USD Coin and Gemini Dollar. But crypto-backed stablecoins are better when you take everything else into account.

    Table of Contents

    • What are stablecoins?
      • Non-collateralized stablecoin
      • Collateralized stablecoin
    • Risks of stablecoins
      • Risks of algorithmic stablecoins
      • Risks of fiat-backed stablecoins
      • Risk of precious metals-backed stablecoins
      • Risk of crypto-backed stablecoins
    • The safest stablecoin
    • Subscribe to the Metaroids Newsletter

    What are stablecoins?

    Stablecoins, simply put, are cryptocurrencies that have stable value. They are usually backed by an underlying asset, and are pegged to a certain price. The price is usually 1 USD.

    Two main categores of stablecoin exist: collateralized and non-collateralized.

    Non-collateralized stablecoin

    Also known as algorithmic stablecoin, this type of token is not backed by an underlying asset. Instead, it has a mechanism that functions similarly to a central bank.

    As a central bank mints banknotes to preserve national currency value, a non-collateralized stablecoin executes a similar process for the same reason.

    But instead of physically minting coins, the algorithm digitally mints them if the demand is higher than the supply.

    But if the supply is higher than demand, it issues shares of “futures coins” to users.

    Basically, the next time demand becomes higher than supply again, the system will mint new coins and those same users that received those shares will be entitled to future coins.

    This is analogous to banks giving out loans.

    You might not know this, but majority of the loans given out by banks are money that they hold. Yep. They have that authority. It’s called fractional reserve.

    They basically give you money they don’t have and force you to pay interest.

    Collateralized stablecoin

    This type of stablecoin scheme requires an underlying asset to be used as collateral in exchange for a token.

    Collateral can be national currencies, precious metals, other cryptocurrencies, commodities, etc.

    Fiat-backed stablecoins are the most abundant in the cryptosphere. The most popular one is Tether, which is backed by USD, and hence, pegged at 1 USD per coin.

    But now, Tether has other separate stablecoin platforms for gold and other fiat currencies like the Chinese Yuan.

    Other precious metals-backed stablecoins include Digix and Kinesis.

    Some stablecoin platforms have multiple collateral. A prominent example would be MakerDAO.

    MakerDAO’s stablecoin, Multi-collateral DAI supports multiple assets including cryptocurrencies, fiat currencies, precious metals, etc.

    Risks of stablecoins

    stablecoins can be risky

    Risks of algorithmic stablecoins

    The riskiest part about algorithmic stablecoins is that it is backed by nothing but an algorithm that tries to balance itself out. Now, in economics there is no such thing as “free lunch”.

    If the price of the stablecoin keeps falling due to waning demand, it might withstand it for a time by minting more. But if it goes on for too long, users will lose confidence that the system will be able to balance out.

    This will trigger a sellout death spiral.

    If that happens, the stablecoins become worthless. What would it take for this to happen?

    Well, that’s another high-risk factor of algorithmic stablecoins. It’s extremely difficult to analyze how much downward pressure the system can take.

    Unknown variables like that does not inspire confidence in a stablecoin. I’d personally stay away from non-collateralized stablecoins.

    Risks of fiat-backed stablecoins

    First of all, fiat-backed stablecoins are centralized, which go against everything the crypto community stand for.

    This also implies that some downsides of national currencies are present in this type of stablecoin, including devaluation caused by inflation.

    There are two types of fiat-backed stablecoins, regulated and unregulated.

    And the most prominent of them all, which is Tether, is not regulated. Obviously, this poses some risk. Having no oversight over their asset means the Tether company could lie about how much US dollar they have as collateral.

    They’ve hidden this for so long until sometime early last year, when they disclosed that only 74% of Tether is backed by USD.

    Yet it is still one of the most traded currencies in the crypto market. In fact, Tether is the only stablecoin with a trading volume that far exceeds its market cap.

    Market Cap VS 24h Volume

    And I’m not sure how much this is gonna change anytime soon. Tether just makes it so convenient to trade in crypto markets.

    It allows you to not have to convert back to your fiat money, which most exchanges do not support.

    Regulated stablecoins like the Gemini Dollar (GUSD) and USD Coin (USDC) are backed by 100% USD. Therefore, they are not as risky.

    Their disadvantage is that they cannot bypass currency controls. For instance, US sanctions against Iran disables Tether from servicing the Middle Eastern country.

    So much for banking the unbanked, right?

    Risk of precious metals-backed stablecoins

    Gold or silver-backed stablecoins usually function as digital representations of physical gold or silver. These precious metals are secured in vaults and can be claimed via tokens, if need be.

    Now does that mean precious metals-backed stablecoins are safe? Not entirely.

    Governments can still seize them.

    Why would they? Well. In the event that crypto technology becomes too powerful, the states would likely want to snuff it out by any means necessary.

    The custodian of the gold or silver will have no choice but to surrender their vaults. This is an extreme scenario but it’s not too far-fetched either.

    Risk of crypto-backed stablecoins

    The most popular crypto-backed stablecoin platform is MakerDAO, with DAI as its stablecoin. Before, DAI used to be backed by Ether only, but now supports other assets like precious metals and fiat currencies.

    But let’s just focus on the crypto assets for now.

    The biggest risk of crypto-backed stablecoins is the volatility of their underlying assets. For instance, back in November 2018 Ether lost almost half its value in a few days time.

    Thankfully, the MakerDAO system was robust enough to handle downward pressure. DAI was able to survive. Had it happened under an hour, I wouldn’t be sure if people would be able to put more Ether in the system in time to keep it afloat.

    So the risk is still there!

    The safest stablecoin

    So all in all, are stablecoins safe? No, but other than the algorithmic model, they are adequate for now.

    Basically, the risk level of an asset-backed stablecoin boils down to its underlying asset. This model is more decentralized but not really the safest.

    If I have to choose, I’d say the safest would have to be the regulated fiat-backed stablecoins like the Gemini Dollar and Coinbase’s USD Coin. What else can I say?

    Since we’re talking about safety here, regulated fiat stablecoins are the best bet. They are being regularly audited and are backed by something that is relatively stable for the time being (USD).

    I wouldn’t say they are the best as a currency, but they are the least likely to crash and burn spectacularly in the near future.

    But I still think MakerDAO is the best stablecoin platform in the world. Now, this is just my opinion. Obviously the market disagrees with me, seeing as Tether is the most widely adopted among all stablecoins.

    But DAI’s system is more decentralized and honestly quite brilliant. It would take an entire blog post to illustrate how cleverly the mechanism is maintaining its stability. I plan to write about it soon.


    Join our newsletter as we build a community of AI and web3 pioneers.

    The next 3-5 years is when new industry titans will emerge, and we want you to be one of them.

    Benefits include:

    • Receive updates on the most significant trends
    • Receive crucial insights that will help you stay ahead in the tech world
    • The chance to be part of our OG community, which will have exclusive membership perks

    Subscribe to the Metaroids Newsletter

    * indicates required

    By signing up, you agree to our Privacy Policy agreement.
    DAI stablecoins Tether
    Share. Facebook Twitter LinkedIn Email Reddit Telegram
    Evan Ezquer
    • Website
    • Twitter
    • LinkedIn

    Evan, the founder of Metaroids, is an OG crypto enthusiast and content creator who has explored the world of blockchain, AI, and other cutting-edge tech for nearly a decade. His ultimate goal is to build the best community on the Internet. Up until January 2023, Evan has been writing on Metaroids under the pseudonym Falkris.

    Related Posts

    GPT-4 vs. GPT-3: 8 Reasons Why GPT-4 Far Surpasses Its Predecessors

    March 20, 2023

    ChatGPT: How AI Can Potentially Impact the World’s Religions

    January 27, 2023

    Humans’ Quest to Decode Animal Languages Through AI

    January 25, 2023

    ChatGPT + Wolfram Alpha: A Super Powerful Assistant

    January 22, 2023
    Add A Comment

    Comments are closed.

    Latest Articles
    Learn

    How to Create Better Full-Body Images in Midjourney

    By Evan Ezquer
    Feature

    GPT-4 vs. GPT-3: 8 Reasons Why GPT-4 Far Surpasses Its Predecessors

    By Damocles
    Lists

    Midjourney Art Styles GigaPack: FREE 200 Prompt Keywords

    By Evan Ezquer
    Metaroids
    Twitter
    • Home
    • About
    • Contact
    • Our Authors
    • Privacy Policy
    • Sitemap
    Privacy Policy and Terms of Services
    Copyright © 2023 - All Rights Reserved.

    Type above and press Enter to search. Press Esc to cancel.