Navigating stablecoins: Which one wins the gold?
Golden Balance: Which stablecoin to choose?
Cryptocurrencies are not just Bitcoin and Ethereum; they encompass a wide range of assets with various characteristics and functions. A significant portion of the market is occupied by stablecoins, which have made remarkable progress over the past 10 years. While in the past, these were solely coins tied to fiat currencies, today, their underlying assets can include commodities, cryptocurrencies, or algorithms.
Max Keiser, advisor to the President of El Salvador and founder of Heisenberg Capital, recently made an intriguing forecast about the future of stablecoins. According to him, gold-backed stablecoins could surpass their U.S. dollar-tied counterparts in the global markets.Keiser argues that gold enjoys historical trust from governments and institutions, unlike dollar-backed stablecoins, which may face political resistance, especially from countries hostile to the United States.
He states that gold-backed stablecoins could "track inflation," whereas dollar-based assets inevitably lose purchasing power over time. This claim is supported by the fact that gold has historically been a value-preserving asset, while the dollar faces inflationary risks.
Loading...
Keiser's statement has garnered attention from the cryptocurrency community, reigniting the debate on which type of stablecoin has the greatest potential.
Stablecoins: Types and features
Stablecoins are cryptocurrencies whose value is pegged to stable assets such as fiat money, other cryptocurrencies, or commodities. They use various mechanisms to maintain a 1:1 peg to the underlying asset. There are several types of stablecoins, each with its own features and uses.
Fiat-backed stablecoins
The most common type of stablecoins are fiat-backed coins. They are pegged to traditional currencies such as the U.S. dollar, euro, or yen. The main advantage of these stablecoins is their simplicity and stability. Each stablecoin is backed by an equivalent amount of fiat currency held in reserve by the issuer. The most well-known examples in this group are Tether (USDT) and USD Coin (USDC). However, there are also several newer projects, such as USD1, recently launched by U.S. President Donald Trump's company.
Fiat-backed stablecoins are widely used on cryptocurrency exchanges and for transferring funds between different jurisdictions. Despite their popularity, they have weaknesses: dependence on central banks and the risk of government intervention, as well as concerns about transparency and reserve backing.
Loading...
Crypto-backed stablecoins
Crypto-backed stablecoins use cryptocurrencies as collateral. This approach might seem unconventional due to the high volatility of cryptocurrencies. However, these stablecoins typically have excess collateral, which helps them manage market fluctuations effectively.
An example of a crypto-backed stablecoin is DAI from MakerDAO, which uses Ethereum as collateral. To create DAI, users send Ethereum to a smart contract, which then issues tokens. This process involves Collateralized Debt Positions (CDPs), ensuring that the tokens are backed by the necessary collateral and preventing their creation without sufficient crypto support.
To create $100 worth of DAI, users need to provide $150 worth of Ethereum as collateral. This 1.5:1 ratio protects the system from sudden market swings, ensuring that the collateral is always higher than the amount of tokens issued. Once created, DAI can be used for various purposes, such as transferring, storing, or investing. To return the collateral, users must return the equivalent amount of DAI. If the collateral value drops below a certain threshold, liquidation occurs, and the collateral is used to cover the losses.
If the price of DAI falls below $1, holders are encouraged to exchange their DAI for collateral to reduce the coin's supply and bring its price back to $1. Conversely, if the price of DAI exceeds $1, the system incentivizes the creation of new tokens to increase supply and stabilize the price.
Commodity-backed stablecoins
Commodity-backed stablecoins are tied to real-world assets such as oil, gold, or other precious metals. Unlike fiat-backed or crypto-backed stablecoins, commodity-backed coins allow holders to participate in the price movements of physical assets in a digital form. By holding a commodity-backed stablecoin, investors essentially own a share of a physical asset.
The issuer of such tokens receives the commodity as collateral (e.g., oil, gold, etc.) and stores it in verified custodians or banks. In return, tokens are issued, which can be redeemed for the real commodity in the future. However, this mechanism is complex and not directly applied in most cases. When assets exit the system, the corresponding tokens are destroyed.
For users who wish to invest in commodity assets without the need for physical ownership, these stablecoins offer a convenient and liquid option. Instead of purchasing physical gold or other commodities, one can purchase PAX Gold (PAXG), Tether GOLD, or DGLD. This approach also incentivizes long-term holders, providing the opportunity to profit from the growth of commodity assets' value without physically storing them.
As noted by Gabor Gurbacs, founder of PointsVille and former executive at VanEck, gold-backed stablecoins are becoming an essential tool for large investors looking to hedge their risks.
Loading...
Algorithmic stablecoins
Algorithmic stablecoins are not tied to specific assets; instead, their value is regulated by algorithms using smart contracts. They attempt to maintain price stability by adjusting supply and demand. For instance, if the price of a stablecoin moves outside a set range, the algorithm may create or destroy coins to correct the price.
An example of an algorithmic stablecoin was TerraUSD (UST): whenever UST was bought or sold, the process of minting or burning its sister coin, LUNA, was triggered to maintain price stability. This model worked for some time, but ultimately, UST was unable to maintain its peg.While algorithmic stablecoins provide a higher degree of decentralization, they remain highly risky, as they are entirely dependent on the functioning of the algorithms and are vulnerable to risks from unsuccessful settings or malfunctions.
Conclusion
Max Keiser believes that gold-backed stablecoins have a bright future, offering a more stable alternative to those pegged to the dollar.
However, fiat-backed stablecoins remain the most popular in the cryptocurrency market today due to their stability and high liquidity. Investors use them as a reliable medium of exchange in the global financial system. On the other hand, such stablecoins may be susceptible to changes in government policies and economic crises, which makes them vulnerable in the long term.
Gold or oil-backed stablecoins are becoming increasingly attractive for those seeking long-term stability and protection from inflation. They are more shielded from market fluctuations and economic instability. However, their usage requires more complex infrastructure and is less liquid for everyday operations.
Ultimately, the choice depends on the investor's goals. If the priority is short-term liquidity and stability for trading, fiat-backed stablecoins are the best choice. However, for long-term protection against inflation and economic risks, commodity-backed stablecoins may provide a more reliable alternative.
For those who believe in the dream of decentralization, algorithmic coins, governed by their communities, are the optimal type of stablecoin. However, it is likely unwise to store significant sums in such tokens, considering their assumed vulnerability.
