How to choose the right stablecoin?

Let's start with a definition. A stablecoin is a type of cryptocurrency tied to another "stable" asset. The most popular stablecoins are pegged to the US dollar (USD), which we'll discuss today.

What are the different types of stablecoins?

There are more than one and a half hundred various stablecoins; two-thirds of them are tied to the dollar, but in reality, not more than a dozen projects are favoured.

And in widespread use, there are at most 4-5 projects; the most promising, in the opinion of the editorial staff, we will consider in detail today.

Tether USD (USDT) is the oldest and most popular stablecoin. It was launched in 2014 by Hong Kong-based iFinex, which is affiliated with the extensive and once industry-leading crypto exchange Bitfinex.

USDT's capitalisation is 2.5 times the total capitalisation of the coin's three closest pursuers, and the token has excellent liquidity (the ability to pay anywhere) and a high margin of community trust.

Even though no one knows precisely where and in what form Tether reserves are stored because they are regularly involved in various scandals, the company's token remains the undisputed leader among stablecoins.

USD Coin (USDC) is the second largest capitalisation stablecoin. It was created in September 2018 by a merger of Centre companies, including famous market participants such as fintech companies Circle and one of the largest crypto exchanges, Coinbase.

Unlike its competitor, the token is characterised by a high degree of transparency of the issuer's reserves. Anyone can assess what amounts are deposited, in which banks and in what form. For example, most of the consortium's assets are in the form of US government bonds.

How to choose the right stablecoin?

Of the disadvantages of the first two stablecoins considered, it is worth mentioning that the code of their smart contracts has a built-in ability to block the assets of any wallet address at the request of regulators.

Therefore, the third DAI project looks quite interesting against the background of general confusion in the sanctions policies of different countries and private companies, as its architecture needs to provide for centralised blocking of wallets.

Although it is worth noting that a large share of the project's reserves is stored in USDC tokens, this fact has an indirect impact on the stability of the token because there is a potential danger of blocking more than half of the project's assets at the same request of US regulators.

Which stablecoin is the best?

The fundamental differences contrast some conditions and principles of buying or selling tokens from their issuer, which is relevant for significant amounts, at least several hundred thousand dollars.

Their differences are minimal if we talk about the everyday use of all these tokens. Differences may exist only in their liquidity - some small marketplaces and shops may only accept some stablecoins for payment, although large projects support them all without exception.

Here it is worth mentioning only less popular stablecoins. Such projects may experience difficulties from a crisis of confidence or lack of liquidity more acutely than their "big brothers". If almost any of the tasks can be suitable for simple storage of small amounts for a short period, in other cases, it is necessary to be more careful in choosing assets.

In this context, we can mention two recent serious scandals around quite large projects, Binance USD (BUSD) and TerraUSD (UST), which speak about less popular tokens.

The US Securities and Exchange Commission sent a pre-trial warning to Paxos, an issuer of BUST on behalf of the Binance exchange, in February 2023. After that, the company stopped issuing new tokens, although the turnover of already issued tokens and their reverse conversion into dollars continued. Therefore, the stability of pegging of quotes to the dollar's value is preserved, but the total volume of circulating tokens is systematically decreasing.

And in the middle of 2022, the once actively gaining popularity algorithmic stablecoin TerraUSD (UST) lost its peg to the dollar due to a chain of disastrous project management decisions. It practically depreciated in hours, the consequences the entire crypto industry is experiencing today.

What is the difference between ERC-20, BEP-20 and TRC-20?

But more than just the type of stablecoin is required. The main difference between "tokens" and "coins" is that the former exists only as an add-on in someone else's blockchain, while the latter have their blockchain. All popular stablecoins are tokens, i.e. they exist thanks to the work of smart contracts in other people's blockchains.

It is important to remember that you should avoid making a mistake when choosing a blockchain to transfer tokens. Otherwise, you can irretrievably lose the funds you have sent.

To begin with, let's understand what these networks are:

• ERC-20 is the designation for tokens in the Ethereum blockchain;
• TRC-20 is the designation for tokens in the Tron blockchain;
• BEP-20 is the designation for tokens in the Binance Smart Chain blockchain.

Blockchains differ in compatibility with different platforms and wallets, speed of transactions, degree of decentralisation and transaction fees.

Apart from the options mentioned above, stablecoins can also work in other blockchains like Solana, Avalanche, EOS, etc.

There is even USDT OMNI, an add-on in the Bitcoin blockchain that allows it to work with USDT tokens. Although in practice, such an outlandish variety is very rarely used.

How to choose a network?

The first question to answer is where and for what purpose are you acquiring stablecoins?

If you only need to store tokens in your wallet, you can rely only on your taste.

Moreover, if the purchase takes place on a crypto exchange, there at the time of sale, the choice of network is not even provided because, formally, on the exchange, any token on your balance is just "drawn" and stored on the exchange's wallet. The choice of blockchain arises only at the moment of withdrawal or replenishment of the exchange wallet, there it is essential to transfer tokens in the right network and avoid making a mistake.

If you buy stablecoins to pay for goods or services or transfer them to friends and relatives, it is worth specifying the recipient's network.

But if the recipient is not essential, or you do not know how you will dispose of the assets in the future, then you can move on to assessing the pros and cons of blockchains.

ERC-20

The main disadvantage of the Ethereum blockchain is a very high commission and relatively long transaction time. Although in practice, because of its historical leadership among all its competitors, it is within Ethereum the most significant number of popular projects, representatives of decentralised finance, and the most excellent liquidity (the size available for exchange stock) in decentralised exchanges (DEX).

BEP-20

Binance Smart Chain is designed to be compatible with the Ethereum Virtual Machine (EVM), so developers can easily port their Ethereum-based projects to the BSC and vice versa. Thanks to this, BEP-20 tokens are not significantly inferior to their predecessors regarding the variety of possible applications in the decentralised finance segment. However, the liquidity stored here is usually noticeably lower than in Ethereum.

But the main advantage of Ethereum compatibility is the possibility of easy integration with marketplaces and wallets developed for Ethereum. For example, you can use the same MetaMask to manage your purse in BSC.

Also, we should remember that the blockchain of the Binance ecosystem is less decentralised than Ethereum. There are several orders of magnitude fewer independent transaction validators, which ensure the independence and stability of the blockchain.

And also, remember the previously announced SEC investigation against BUSD. However, the blockchain's other stablecoins (USDT, USDC, etc.) are not subject to the same risks as the stablecoin directly from Binance.

TRC-20.

The tokens on the TRON network are most popular among people who frequently transfer funds to others. TRC-20 tokens have become popular due to the reasonably fast processing of transactions in the blockchain and low fees.

Such tokens are supported by most centralised exchanges, shops and marketplaces despite their much less practical use in DeFi.

But the main disadvantage of TRC-20 tokens is less convenience because TRON is incompatible with Ethereum and BSC. Accordingly, users of this blockchain need access to decentralised applications and wallets based on Ethereum. To manage your funds, you must install other applications (unless your wallet was originally multicurrency).

Let's summarise the main advantages and disadvantages of the networks:

Binance Smart Chain and TRON have high transaction speeds and low fees. Transactions with ERC-20 tokens are more expensive and take longer to confirm.

But Ethereum is the most decentralised, with the most significant number of decentralised applications and noticeably better liquidity.

And BEP-20 tokens are least often found in exchanges and P2P platforms, so exchange rates for this version are usually less favourable.

Conclusion

We have tried to tell you the main nuances when choosing a stablecoin. However, we cannot recommend any particular token for any specific blockchain. Different tokens are suitable for various tasks; the choice is yours alone.

The main thing to remember is that no stablecoin can give an absolute 100 per cent guarantee of safety. Risks of loss, although negligible, always exist, so carefully approach the study of the project before buying this or that stablecoin.

It may be more rational to divide the capital between USDC, USDT and other popular tokens for vast sums of money and simultaneously store funds in several blockchains. So that in case of force majeure, you don't lose everything at once.