Stablecoins represent a class of cryptocurrencies that are meant to preserve value over time. Unlike traditional cryptocurrencies, stablecoins obtain their value from an underlying asset or algorithm.
Fundamentally, stablecoins are either algorithmic or collateralized. Stablecoins that are collateralized or asset-backed can have on-chain collateral, in the form of cryptocurrencies, or off-chain collateral, such as fiat reserves.
There are also commodity-backed stablecoins that use commodities, such as real estate, oil, or precious metals, as collateral. Finally, algorithmic stablecoins seek to gain price stability via smart contracts and algorithms, that control the token’s circulating supply.
Over the past few months, stablecoins have been under harsh criticism due to the infamous de-pegging of Terra’s (CRYPTO: LUNA) algorithmic stablecoin TerraUSD (CRYPTO: UST).
Terra founder Do Kwon proposed the Anchor program, which promised UST investors an 18% APY. Despite warnings of its failure, Kwon continued with its launch, which lead to its inevitable de-peg. As a result of the stablecoin’s downfall, Terra investors globally lost over $60 billion.
Alongside UST, Tron’s (CRYPTO: TRX) stablecoin USDD (CRYPTO: USDD) has also been de-pegged over the past few weeks. On June 19, USDD reached an all-time low, trading at $0.925. It has now stabilized up to $0.9865.
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Tether (CRYPTO: USDT) is another stablecoin that has been under public questioning, for its apparent lack of collateral reserves and commercial paper holdings. The stablecoin has seen large-scale liquidations, as the crypto market has continued its downtrend.
$1 invested into UST at the time of its launch would currently be worth $0.028, giving a negative return on investment of 97.2%. Furthermore, $1 invested into USDD at its launch would currently be worth $0.9862, giving a negative return on investment of 0.0138%.
Tether is currently holding price stability, trading at $0.99. Thus, only giving initial investors are marginal negative ROI. An important use case for stablecoins to consider is its staking and lending benefits. Therefore, certain stablecoins may be a few points down but could have provided investors larger rewards on staking returns.
Thus, following the black swan event of UST, investors globally are shifting their interests to safer stablecoins, with underlying assets and collaterals.
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