Stablecoins, the Dollar, and the Top 5 Ideas to Watch Out for in the Second Half of 2022

A way to manage crypto’s trademark volatility, what a concept.

Stablecoins are one of the most successful ideas that the cryptocurrency industry has produced. At the time of writing, the big three stablecoins are in third, fourth, and eighth places in Coinmarketcap’s top 10. Stablecoins also produced the Terra/ Luna collapse, one of 2022’s biggest failures and most fascinating stories.

So, the stablecoin idea is alive and pulsating, albeit brused, waiting for its next revolution.

Before getting into today’s list, let’s get some concepts straight. Most stablecoins manage volatility by being backed by collateral of some kind. That collateral could be in the form of fiat currency, other cryptocurrencies, commercial papers, a commodity, or a mixed bag of commodities. The general idea is that users are supposed to be able to exchange their stablecoins for the currency or commodity they represent. 

This isn’t always true, and that’s the dark side of stablecoins. 

Each and every one of them poses counterparty risk. First of all, you have to trust the issuer. Nowadays, it’s fashionable for those institutions to publish their proof of reserve, and the fact is that most of those are in commercial papers, that is, bonds and treasury bonds, CDs, etc. That means that the user’s money isn’t readily available and most of them would end up holding the bag in case of a theoretical bank run. 

A more plausible scenario, though, is a recession or a financial crisis of some sort. The world might be going through one at the moment, actually. When these situations happen, credit dries up and liquidity becomes a problem. In that scenario, users will probably get the short end of the stick. However, it’s an extreme situation. And speaking about those, censorship is another major risk. As we’ll see when we discuss Circle’s USDC.

Before moving on, let’s address algorithmic stablecoins. Terra’s USD is this idea’s most prominent and present example. The basic idea here is that an algorithm burns or mints new coins depending on demand. Instead of collateral, this delicate balance is what is supposed to keep the stablecoin pegged to the desired asset. As we saw with Terra’s collapse, this approach creates a major target and contemplates a major risk. Are algorithmic stablecoins dead? Not necessarily. Someone might still crack the code. For now, though, we’re even going to consider them.

The big three are Tether’s USDT, Circle’s USDC, and Binance’s BUSD. The other competitive player, currently sitting at #15 on the charts, is Maker DAO’s DAI. Those four control 92% of the market and all of them are pegged to the US dollar. Pair this revealing fact with this statistic Cointelegraph recently shared, “according to the crypto data provider CoinGecko, the value of all stablecoins equals $155 billion, while the total market capitalization stands at $946 billion.” So, stablecoins currently represent 17% of the crypto market.

Magic Internet Money, $MIM - Abracadabra Money’s main product is pegged to the USD and “is backed by interest bearing tokens.” $MIM is multichain. The token works in Ethereum, Binance Smart Chain, Fantom, Avalanche, and Arbitrum. They’re currently integrating Polygon as well. That means collateral can come in the form of most “interest bearing tokens” in each of those blockchains.

Buyers beware: the peg to the dollar in each chain is pegged by a balancing act similar to algorithmic stablecoins, in which most of “the Market to Market arbitrage is done by automated bots that constantly monitor pools for opportunities to capitalize on these price differences. This has the benefit of having price pegs being corrected quite rapidly.”  

TrueUSD, $TUSD - This coin’s main selling point is that it’s regulated, so users have to complete KYC and AML checks before using it. The company promotes it as “the first independently-verified digital asset redeemable 1-for-1 for US Dollars.” The schtick is clearly working, as TUSD currently sits at #48 in Coinmarketcap. It’s a multichain token that works in Ethereum, Tron, Polygon, Binance Smart Chain, Fantom, Avalanche, Arbitrum, Heco, Cronos, Optimism, and Aurora.

The other important characteristic they brag about is their proof of reserve procedures. Their whitepaper claims, “through a partnership with Armanino, a top-25 US accounting firm, TrueUSD holders are able to view a real-time dashboard of TrueUSD funds, advancing transparency from months to minutes.” 

GHO by Aave - This one doesn’t exist yet, but it might be a game changer. One of DeFi’s premier lending protocols, Aave, recently proposed GHO to the DAO that controls it. “GHO would be backed by a diversified set of crypto-assets chosen at the users’ discretion, while borrowers continue earning interest on their underlying collateral.” 

Don’t go making any plans for those interests just yet, though, because GHO’s aim is to “generate additional revenue for the Aave DAO by sending 100% of interest payments on GHO borrows to the DAO.”

Stablesats by Galoy - This novel solution to the stablecoin problem is exclusive to bitcoin and comes with the premiere cryptocurrency’s security guarantees. According to their creators, “Stablesats uses derivatives contracts to create a bitcoin-backed synthetic dollar pegged to USD. This enables dollar-equivalent USD accounts inside of Lightning wallets.”

The main innovation here is that “There is no stablecoin or token other than bitcoin underlying Stablesats, which means better interoperability and lower fees for users.”

Paxos’ PaxG and USDP - Paxos’ blockchain solutions provide two stablecoins, one pegged to gold and the other to the dollar. Both of them are backed by Paxos' stellar reputation and $500 million in total funding.

If a user wants to be exposed to the price of the world’s most coveted commodity, without the risk and inconvenience of actually holding it, PaxG is the solution. “Each token is backed by one fine troy ounce (t oz) of a 400 oz London Good Delivery gold bar, stored in Brink’s vaults. If you own PAXG, you own the underlying physical gold, held in custody by Paxos Trust Company.”

If a user wants a regulated solution to the stablecoin problem, “USDP is reviewed by a top-ranking auditing firm on a monthly basis to verify its supply matches the reserve account comprised of US Dollars and debt instruments that are expressly guaranteed by the full faith and credit of the United States Government.” The Pax dollar currently sits at #56 in Coinmarketcap’s ranking, proving there’s clearly a market for these fully regulated, fully compliant stablecoins.