The Safest Stablecoins to Own
There has been a lot of FUD (fear, uncertainty and doubt) regarding stablecoins. This shouldn’t surprise people given what has happened to the collapse of the UST, the algorithmic stablecoin of the Terra/Luna ecosystem. However, this doesn’t make all stablecoins equal by nature. In order to understand the underlying features of stablecoins they will possess two dichomotic features:
Stablecoins will either be Centralized or Decentralized
Stablecoins will either be Collaterized or Algorithmic
Each feature will have their advantages and drawbacks. Centralized stablecoins are going to be supported by some kind of institution such as an exchange. Decentralized Stablecoins are going to be minted by a protocol. A collateralized Stablecoin will have some kind of asset backing it. Algorithmic stablecoins are based on what the name suggests, it is based on a mathematical algorithm to maintain the price.
This demands stablecoins to focus on three features; Peg Stability, Decentralization and Capital efficiency. This usually demands some sort of tradeoff in which you can build your stablecoins with two of the three features. Investors need to know they can always redeem their stablecoins for $1 worth of real money, this is the peg stability. A major ethos of crypto is the desire for decentralized trustless permissionless wealth, that is no institution truly controls it. Some of these institutions have freezing policies on their stablecoins which have been enabled. However, most of these cases are related to criminal activities. The third is capital efficiency, that is the stablecoin is backed with the least amount of wealth, or as close to 1:1 of the actual value of the fiat currency it is supposed to represent.
Luckily, there are some Stablecoin regulations for those in the State of New York. Even those outside the State of New York can piggyback off those regulations. It’s one of those weird benefits in which laws designed to protect largely institutions from fraud are able to roll over to retail investors. For this article, I’ll create a tier list of the safest coins and work our way down to some opportunties that exist to make money on.
Prime Grade
Most of the top grade stables are going to be centralized currencies for the most part. The reason is simple: people need a way to redeem their stablecoins for dollars on exchange. They also shouldn’t have to concern themselves with contract exploits or failing collateral rates. Many of the coins here are going to be Greenlisted by the NYSDFS. This means they have stablecoins backed 1:1 with Dollars or have treasury bills backing the value of their stablecoin. In addition, they have been audited by a CPA to ensure they have the reserve requirements for their stablecoin.
Binance USD (BUSD)
Based Currency: USD
Collateral: 1:1 USD
Mint: Centralized
Regulatory: NYSDFS
Liquidity: Large
Usability: Great
Chain Usage: 33
I was absolutely shocked with myself listing this coin as the top tier Stablecoin. Binance is associated with degenerate cryptocurrency trading. In reality, this stablecoin is completely regulated by the New York State Department of Financial Services with the partnership of Paxos, a regulated institution in the State of New York. The very same exchange that this coin is named after doesn’t even operate in New York.
What is great about BUSD is the number of Ecosystems that use this coin. Anywhere between well developed ecosystems like Ethereum or BNB to up and coming chains such as Astar or Moonbeam. This makes this stablecoin an easy choice to own. New Yorkers can easily acquire these coins on dexes and Centralized Exchanges like Paxos and Gemini. BUSD is about as competitive against USDC and USDT interms of usability with the certainty of its collateral.
Gemini Dollar(GUSD)
Based Currency: USD
Collateral: 1:1 USD
Mint: Centralized
Regulatory: NYSDFS
Liquidity: Moderate
Usability: Moderate
Chain Usage: 2
I would argue this is the second best compared to BUSD. Absolutely safe to hold designed to be backed 1:1 to the USD with regulatory oversight. It is available to purchase on both Coinbase and Gemini.
The only downside is widespread adoption. Most of its use case is to be used on Ethereum although not as widely used as other stablecoins. However, The Gemini Earn program offers a fair decent amount of yield on their own token, ranging between 5% APY to 8% APY depending on market conditions. At the moment, there isn’t much on chain use for the tokken. Here are some defi protocols to use with your GUSD. I would argue it is a decent coin to own if you want to wait for dips to come but you do not want to have USD sitting around for Limit Orders to hit.
AAVE
CURVE
Pax Dollar(USDP)
Based Currency: USD
Collateral: 1:1 USD
Mint: Centralized
Regulatory: NYSDFS
Liquidity: Moderate
Usability: Moderate
Chain Usage: 2
It is very similar to GUSD except not as widespread in use . It has a far greater market capitalization but it is far harder to find yielding opportunities. This alone gives GUSD an advantage over USDP. The major use case for USDP is as a USD substitute. It isn’t unusual for other central exchanges to use USDP as a white label stablecoin for their own reserves.
Other Top Grade Stablecoins
I’m adding this part of the list but I am not going to go into too much detail. This is an entire list of coins that are certified to be backed 1:1 to their proper asset. All of these are regulated by NYSDFS and are audited. However, they lack so little use for the average retail user that it is only worth glossing over details.
Pax Gold(PaxG)-A Cryptocurrency minted at the ratio of 1 paxg to 1 troy ounce of gold. You can yield it on Gemini Earn. Otherwise not much else in utility besides trading the price of Gold.
ZUSD- Created by the GMO-Z.com Trust Company. Lacks much utility besides holding an ERC-20 form of USD.
GYEN- Created by the GMO-Z.com Trust Company. Lacks much utility besides holding an ERC-20 form of the Japanese Yen.
Near Prime Grade
This section includes stable coins that are not likely to fail but there are uncertain risks behind these stablecoins that could lead them to failing. However, they are close enough to Prime grade that they are decent substitutes with certain advantages over Prime Grade stablecoins.USD Coin(USDC)
Based Currency: USD
Collateral: 1:1 USD
Mint: Centralized
Regulatory: Uncertain
Liquidity: High
Usability: High
Chain Usage: 58
This might belong in the prime grade of stablecoins but there are a few things that do concern me about it. On a high note, it seems more or less aiming at being a legitmate 1:1 stablecoin for the USD. It holds its cash and T-Bills in institutions such as Blackrock and Bank of New York Mellon. Their treasuries are audited by a major accounting firm, Grant Thorton. These are all reports being issued to the SEC in preparation for an IPO on the New York Stock Exchange.
There are some things that don’t make it equal to say BUSD, GUSD or USDP. The one striking difference between the prime grade Stablecoins and USDC is the approval by the NYSDFS for issuance. In other words, for a centralized crypto, it is currently without an actual regulator to support it. There is a reason why USDC is not on the current Greenlist for Stablecoins. Unlike Gemini and Paxos, USDC reserves are controlled by their company, not a trust.
There are some clear advantages of USDC. It is one of the most commonly accessible Liquid Assets in crypto. It is used on nearly any platform. Even if Circle, the company that founded USDC, doesn’t support a particular ecosystem, it isn’t unusual for someone to create a bridge to bring over the USDC stablecoin. There is a costant demand for this coin. It is clearly trusted despite a lack of clear regulatory oversight.
DAI (DAI)
Based Currency: USD
Collateral: Mix
Mint: Decentralized
Regulatory: MakerDao Protocol
Liquidity: High
Usability: High
Chain Usage: 37
This is the top number 1 most trusted decentralized Stablecoin in crypto. It is what is known as a “soft pegged” cryptocurrency regulated by the MakerDao protocol. It uses a series of mechanisms to regulate the price of the DAI cryptocurrency. It was launched in 2017 and has been holding well up to date. It works so well that other projects tend to model themselves after the MakerDao Protocol.
The creation of Dai is used with what is known as a Collaterlized Debt Position (CDP). Every time someone wants to create or mint new DAI, they need to use another asset as collateral. This is usual Ethereum but there are other assets that can be used as collateral as well. As long as a satisfactory amount of Collateral value is able to cover the amount DAI borrowed, you do not run the risk of being liquidated. However, if there is an inadequate amount of collateral, the protocol sells your collateral on the open market.
There is a lot of game theory on why DAI is able to maintain its peg. The price of DAI is regulated by the market. If DAI falls below $1, people with CDP have an incentive to buy DAI on a discount and pay off their CDP. If Dai raises above $1, people have an incentive to borrow more DAI and sell it at the difference above $1. The Coin Bureau has a fantastic video regarding the DAI stablecoin if you are interested.
USDT (Tether)
Based Currency: USD
Collateral: Not Sure
Mint: Centralized
Regulatory: None
Liquidity: High
Usability: High
Chain Usage: 60
Tether is a strange stablecoin. Tether is the largest Stablecoin by market capitalization. It is the most widely used stablecoin. The irony is that nobody really trusts it. At one time in its history, Tether lost its peg against the dollar dropping down to 60 cents. Most veteran crypto investors I know trade in and out of tether but they would never hold onto it for the long term. I was debating whether to place it down the sub-prime grade stablecoins. Like USDC, the tether reserves are controlled by a company, not a trust. If they go bankrupt, you may not be able to get your money back.
However, Tether isn’t controlled by some shady weirdos living in their mother’s basement. Tether limited is a real company with apparently real reserves. We already know who the team is behind Tether. Their only problem is that no one knows what is backing their reserves. If it wasn’t for the usability, the age of the company and the high market capitalization, I would rank this stablecoin at a lower grade. A little warning on Tether, DollarCostCrypto was speaking to Charlie about a possible destruction of Tether. Once USDC flips tether in terms of Market Capitalization, there is a possibility for Circle to aim at destroying Tether.
**Subprime Grade
This set of stablecoins are going to be focused at the protocol level. As investors, we should seek time to prove the real value and durability of these stablecoins. In the long run, the status of these stablecoins can upgrade out of the subprime grade into near prime or a prime grade stablecoin.
Alchemix USD (ALUSD)
Based Currency: USD
Collateral: Crypto
Mint: Protocol
Regulatory: Alchemix Protocol
Liquidity: Low
Usability: Low
Chain Usage: 4
This is a very interesting project. It is basically like the DAI token. You mint it by using collateral to borrow against. However, it has a very cool twist on it. It takes advantage of the defi opportunities out there. By doing this, the Alchemix team created a protocol that pays down the debt of the Alchemix CDP. It is a novel idea that I keep on my radar. It is still a new project that needs some time to prove itself. The governance equivilent for this token is the Alchemix token.
Origin Dollar (OUSD)
Based Currency: USD
Collateral: Stablecoins(USDC, USDT and DAI) and Stablecoin yields
Mint: Protocol
Regulatory: OGV Token
Liquidity: Low
Usability: Low
Chain Usage: 1
I like this crypto due to the simplicity of aiming to achieve reasonably high yields for users. OUSD is a stablecoin that is backed up by other stablecoins such as USDT, USDC and DAI. I happen to like the team behind this cryptocurrency, Origin Protocol. Rather than trying to find yields for yourself, you can use the OUSD protocol to seek it for you. As your OUSD yields over time, your stack of OUSD increases. Also, for tax purposes, you might want to look into Wrapped OUSD (WOUSD). It is basically an OUSD that appreciates invalue instead of giving you more tokens against your yield. A hack did occur at one point in its time, there that might deter some from using this protocol. It has a governance token with the ticker symbol OGV. As I said about the risks of USDT, this coins is collateralized by USDT, so there should be some caution using it.
MAI (MiMatic)
Based Currency: USD
Collateral: Crypto
Mint: Protocol
Regulatory: QiDao Protocol
Liquidity: Low
Usability: Low
Chain Usage: 16
Very similar to the DAI token system. However, unlike DAI, you borrow your stablecoin with zero interest. However, there is still a risk of liquidation if the loan is not paid back. The nice feature about this coin is the wide selection of ecosystems you can use this stablecoin; Ethereum, Polygon, Fantom, Metis, Avalanche and Optimism.
sUSD (SUSD)
Based Currency: USD
Collateral: SNX
Mint: Protocol
Regulatory: Synthetix DAO
Liquidity: Low
Usability: High
Chain Usage: 5
First off, this is probably one of my favorite decentrlized stablecoins out there. This is a stablecoin created for the decentralized trading protocol, Synthetix. You use SNX to mint SUSD and use it to trade on their platform. Even if you have no plans to be a trader, there are some fantastic opportunities. Every trader is responsible for maintaining what is called a “c-ratio” or collateral ratio to make sure the position of their SUSD is covered. Whether it is a bull market or bear market, there is going to be demand for SUSD and SNX for those trading on the platform. I’ve seen some fairly juicy yields for both SNX and SUSD on lending protocols such as AAVE. When there is a huge demand for one of these two coins, you can see the APY on your coins pop off. I’ve seen the APY on SUSD go as high as 80% apy.
Liquity LUSD
Based Currency: USD
Collateral: ETH
Mint: Protocol
Regulatory: None
Liquidity: Low
Usability: High
Chain Usage: 6
This is basically another DAI style token. Unlike dai in which you pay interest against the collateral, you pay a one time fee for borrowing against your assets. Since its inception, it has been anything but stable. It came out around april of 2021 and has price fluctuations between $0.89 to $1.16. There is a malincentives loaded into this system, known as the stability pool. In other words, bad actors have a reason to wick the price of LUSD out of your collateral. If you plan on using LUSD, you should consider becoming a stability pool provider. You could also place limit orders to catch the dip on this coin and make gains on its appreciation.
mStable USD (MUSD)
Based Currency: USD
Collateral: Stablecoins (USDC, USDT, DAI, *SUSD)
Mint: Protocol
Regulatory: None
Liquidity: Low
Usability: High
Chain Usage: 3
*Note: SUSD collateral is only available on the ethereum chain*
I find this project to be as interesting as eating tofu when you know steak is easily available. It maintains its peg by being backed by other stablecoins. You can go to the dapp and swap your stables for MUSD, becoming a pool provider. The dapp offers a little bit of yield by placing your MUSD into the vaults. You should also be careful with this coin as it is backed by USDT as part of its basket of stablecoins.
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