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What is a Stablecoin and which one is best?

Published 29 October, 2019

    To even begin answering the question of what is the best stablecoin, we need to first define what a stablecoin is and what function it serves.

    What is a Stablecoin?

    A stablecoin is a cryptocurrency pegged to or backed by a currency’s or commodity’s value. Typically, a stablecoin’s value and the currency or commodity it is pegged to is 1:1. This is because the goal of a stablecoin is to provide a “stable” medium of exchange when trading more volatile digital assets (i.e Bitcoin or Ether). Additionally, stablecoins provide the ability for people to take advantage of the monetary benefits blockchain technology provides without giving up the price stability of state-backed currencies like the U.S. dollar, or global reserve assets like gold.

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    How is a Stablecoin’s Price Determined?

    A stablecoin’s price is directly determined by the market value of the currency or commodity it is pegged to. As a result, a large number of stablecoin prices are pegged to USD because it’s one of the most liquid and stable forms of money in existence. Some other well known stablecoins that aren’t pegged to USD are bitCNY (pegged to the Chinese Yuan) and PAX Gold (pegged to gold).

    One of the main reasons stablecoin price stability is useful is because it provides less friction when a person is trading between different digital assets. For example, a trader who believes the crypto market is going to see a correction could sell their more volatile cryptoassets for a stablecoin, wait for the market to correct, and then buy back in to the more volatile cryptoassets when they believe the market has stabilized. If stablecoins didn’t exist, a trader would have to sell their crypto, hold fiat or commodities, and then buy back.

    Stablecoins are tied to the price of fiat currencies and commodities, and therefore, are also tied to their monetary properties. Take USD, for example, it has a relatively low inflation rate year-over-year as well as low volatility in comparison to many global currencies. Having a stablecoin pegged to USD (or other major currencies and commodities) provides easier access to economic stability for people in countries with economic instability. In many cases, cryptocurrencies are often more accessible than traditional banking services. This is particularly helpful for people in countries experiencing hyperinflation. Stablecoins provide a digital safe haven where people can securely store their money and earn interest.

    In theory, most cryptocurrencies provide global economic opportunity, but since the market for cryptocurrencies is still developing, speculation has led to significant volatility. While speculation isn’t necessarily a bad thing, speculative assets aren’t great for storing large amounts of personal wealth. One might not find it practical to pour their life savings into a currency that could swing 20% in price in a single day. This is the problem that stablecoins solve. A stablecoin in many aspects is a monetary bridge from traditional finance to cryptocurrency.

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    What are USDC and Gemini Dollar (GUSD)?

    There are currently dozens of stablecoins, but only a handful are widely used. So instead of putting together a list of stablecoins, let’s just focus on two of the top stablecoins: USDC and Gemini Dollar (GUSD).

    USDC is a stablecoin that was created by Coinbase and Circle. It stands for USD Coin. As you can probably guess, its price is backed 1:1 by the U.S. dollar, meaning 1 USDC is equivalent to $1 USD. The mission of USDC according to Coinbase is, “To let dollars move globally from your crypto wallet to other exchanges, businesses, and people.” The global accessibility of USDC is powered by the Ethereum blockchain, which means it can be held in any Ethereum wallet (ERC-20). This is useful because ERC-20 wallets are one of the most popular crypto wallet types for sending, receiving, and storing digital assets.

    Gemini Dollar (GUSD) is a USD stablecoin that was created by Gemini. Similar to USDC, GUSD is an ERC-20 token that is compatible with Ethereum wallets. It is the world’s first regulated stablecoin, according to Cameron Winklevoss, Gemini’s president:

    “The U.S dollars that correspond to the Gemini dollars issued and in circulation will be held at a bank located in the United States and eligible for FDIC “pass-through” deposit insurance, subject to applicable limitations. In addition, the U.S dollar deposit balance will be examined monthly by an independent registered public accounting firm to verify the 1:1 peg.”

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    Added Benefits of Stablecoins

    Stablecoins open up possibilities for people to use blockchain payment rails to move money. In many cases, the 24/7 nature and low payment processing costs are a benefit when compared to traditional payment systems.

    Additionally, stablecoins create interesting solutions in terms of accessibility. For example, high net-worth individuals generally have access to private banking relationships that enable them to store wealth in a currency different than their home country. Stablecoins open up the possibility for individuals to store wealth in USD regardless of how much capital they have. We believe that stablecoins will help facilitate more globally accessible markets for services like earning interest and borrowing at low rates.

    With a BlockFi Interest Account (BIA) you can hold stablecoins and earn monthly compounding interest. Our stablecoin interest rates are industry leading and significantly higher than most traditional financial institutions. Furthermore, with Interest Payment Flex you can choose to have your interest paid in a different currency than the primary one you’re holding. This means you could hold GUSD and get paid interest in BTC or one of our other currencies. If you’re looking to diversity your assets, this could be an appealing option.

    So, what’s the best stablecoin? It really depends on what your needs are. If you’re looking to use a stablecoin pegged to USD, GUSD or USDC could be good options since they’re widely used and accessible. On the flipside, stablecoins pegged to other currencies could also be of significant use depending on what markets you’d like to participate in. Ultimately, the best stablecoin will be the one that provides the most utility for your needs. And as crypto continues to develop, the more use cases there will be for stablecoins.

    You can learn more about how the BlockFi Interest Account (BIA) works here. For any additional questions about BlockFi, please contact us at +1 (646) 779-9688 or support@blockfi.com. We love hearing from you.

    – The BlockFi Team

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    All BIA balances are stored in a custodial account with Gemini.
    Rates for BlockFi products are subject to change. Digital currency is not legal tender, is not backed by the government, and BIA accounts are not subject to FDIC or SIPC protections. For more information, please see BlockFi’s Terms of Service.
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    Disclaimer: Rates for BlockFi products are subject to change. Digital currency is not legal tender, is not backed by the government, and BIA accounts are riot subject to FDIC or SIPC protections. Security is our top priority. Please see our Vulnerability Disclosure Form and Bug Bounty Program.
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    Disclaimer: Rates for BlockFi products are subject to change. Digital currency is not legal tender, is not backed by the government, and BIA accounts are not subject to FDIC or SIPC protections. Security is our top priority. Please see our Vulnerability Disclosure Form and Bug Bounty Program.
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