Half 4: A newbie’s information to crypto for S’poreans: The large world of stablecoins

Cryptocurrencies have lengthy been characterised by volatility. Way back to 2013 – when Bitcoin rallied from US$550 to US$1,200, and again all the way down to US$800 in a matter of weeks – it grew to become obvious that there was a necessity for a extra steady type of cryptocurrencies within the crypto area.

In conventional finance, they fluctuate from commodities corresponding to gold and silver, to fiat currencies just like the US greenback. Buyers use these property to hedge and handle their threat publicity throughout instances of uncertainty. 

As with all funding, it’s key to know what you’re investing in – thus far in our newbie’s information to crypto, we’ve talked in regards to the relationship between blockchain and cryptocurrencies, gone over a variety of various blockchain purposes corresponding to NFTs and DeFi – from blue chips corresponding to Bitcoin and Ethereum, to higher-risk meme cash like Shiba Inu, in addition to explored why individuals are paying extraordinary quantities for NFTs.

In partnership with Luno’s training hub, Luno Uncover, let’s now check out stablecoins – one other important phase of the crypto area. 

What are stablecoins and the way is it used? 

A stablecoin is a cryptocurrency which, because the title suggests, is designed to take care of a comparatively fixed value. That is often achieved by pegging the worth of the coin to a different asset class corresponding to gold, or foreign money such because the US greenback. 

Stablecoins are sometimes used to work together with property which might be extra liable to sharp value actions. Identical to the title suggests, the steadiness of the stablecoins assist to minimise volatility and offers extra certainty to the worth of the respective portfolio. 

They’re additionally used to facilitate trades on crypto exchanges – most frequently considered like a “bridge” between fiat foreign money and cryptocurrency. As a substitute of shopping for cryptocurrency with fiat foreign money which requires extra steps, time and/or prices, merchants change fiat for a stablecoin and carry out trades.

Particularly in international locations that have politico-economic crises the place native currencies lose excessive worth, stablecoins are borderless, simply transferable and keep worth wherever you’re on the earth. As a result of that, its software for funds and remittances can be one other good use case. 

How and what are stablecoins pegged to?

Stablecoins might be labeled into one in all 4 totally different classes:

1. Fiat-backed stablecoins

These are probably the most broadly used number of stablecoins, often backed 1:1 by fiat foreign money. 

For instance, Tether (USDT) – which was one of many first stablecoins to be launched again in 2014 – is backed by the US greenback. All issued models of USDT are matched by an equal quantity of US {dollars} saved in Tether’s reserves. This ensures that holders are capable of redeem 1 USDT for US$1, and vice versa. 

As of now, USDT has the very best market cap amongst all stablecoins and is the third largest cryptocurrency, behind Bitcoin and Ethereum. 

USD Coin (USDC) is subsequent within the rankings and can be fiat-backed. 80 per cent of the full stablecoin provide is shared between these two cash. 

Many crypto exchanges permit customers to deposit their USDC or USDT holdings in change for rates of interest / Picture Credit score: Bitcompare

It’s value noting that the reserves of fiat-backed stablecoins aren’t at all times made up of money. They might additionally include money equivalents corresponding to treasuries and bonds. These reserves are indicator of how safe the peg between a stablecoin and its underlying foreign money is.

As a rule of thumb, the extra liquid the reserves, the extra steady the peg. Think about a state of affairs of panic the place 1000’s of buyers wish to convert their stablecoins again to fiat foreign money. If the stablecoin has all-cash reserves, it is going to don’t have any downside fulfilling this demand and sustaining its peg. 

Nonetheless, say the reserves are partially made up of bonds which might solely be transformed to money in a number of months’ time. On this case, the reserves wouldn’t have sufficient liquidity to fulfill the sellers’ calls for. This might trigger the stablecoin to de-peg and lose its worth. 

For Singaporeans, XSGD is a alternative of SGD-backed stablecoin. The issuing firm, Xfers, is licensed by the Financial Authority of Singapore (MAS) underneath the e-money issuance framework. As a part of this framework, XSGD is required to be backed 1:1 by Singapore {dollars} saved in a neighborhood financial institution. 

Xfers additionally publishes an attestation report – ready by an impartial accountant each month – detailing the variety of XSGD tokens in circulation and the quantity of Singapore {Dollars} held within the firm’s reserves. 

2. Commodity-backed stablecoins

There are additionally stablecoins backed by property corresponding to treasured metals or oil, which share the identical volatility as their underlying property. They permit buyers to realize entry to real-world commodities with out having to exit the crypto area. 

PAX Gold (PAXG) is among the most well-established stablecoins on this class, and ranks among the many high 100 cryptocurrencies by market cap. Every unit of PAXG represents one troy ounce of a gold bar saved in an expert vault. 

pax gold
The worth of commodity-backed stablecoins fluctuates in accordance with the asset which they’re pegged to / Screenshot of CoinMarketCap

It is a handy option to acquire publicity to gold because the minimal funding required is as little as US$20, and there’s no extra storage expenditure. Buyers who’d be priced out from shopping for commodities in conventional markets can acquire entry to them utilizing stablecoins. 

PAXG might be redeemed for bodily gold bars and US {dollars}, or traded in change for different cryptocurrencies. Consequently, it offers buyers with much more liquidity than different types of gold investments.

Tether Gold (XAUT) is one other standard gold-backed stablecoin, issued by the identical firm that launched USDT. 

3. Crypto-backed stablecoins

These stablecoins have their worth pegged to a fiat foreign money or commodity, however they’re backed utilizing crypto property as an alternative. 

For instance, Dai (DAI) tracks the US greenback and is just issued in change for crypto-based collateral. 

A few of the cryptocurrencies which can be utilized as collateral for DAI / Screenshot of Oasis.app

With a purpose to obtain 10 DAI (value US$10), a consumer may need to deposit over US$15 value of Ethereum or one other cryptocurrency. That is to safeguard towards crypto volatility. Even when the worth of the deposit have been to fall as much as 33 per cent, it could nonetheless be value sufficient to account for the issued DAI. 

If the worth of the collateral fell even additional beneath, it could get liquidated by way of an automatic course of. For instance, a platform would possibly require that the collateral’s worth should at all times be 1.2 instances the worth of the mortgage. On this case, if the worth of the consumer’s Ethereum deposit fell beneath US$12, it could get liquidated and they’d lose your entire quantity. 

Regardless of these safeguards, crypto-backed stablecoins are usually riskier than their fiat counterparts. When investing in such cash, it’s necessary to gauge the power of their peg by checking how a lot extra collateral is held within the reserves, and which alternative of cryptocurrencies are accepted as collateral. 

4. Algorithmic stablecoins

Lastly, there are algorithmic stablecoins, which additionally depend on different cryptocurrencies, however not for collateral. 

Essentially the most well-known stablecoin on this class is one which not exists. In truth, its downfall was a serious catalyst resulting in the 2022 crypto downturn. 

TerraUSD (UST) was once the official stablecoin of the Terra blockchain. It maintained its peg to the US greenback via an algorithmic relationship with its sister cryptocurrency Terra (LUNA). 

If the worth of UST ever went above US$1 (on account of excessive demand), LUNA holders might change US$1 value of LUNA for 1 UST. Equally, if the worth of UST went beneath US$1 (on account of lack of demand), UST holders might change 1 UST for US$1 value of LUNA.

This arbitrage alternative was meant to make sure that any deviations in UST’s value would appropriate themselves and its worth would at all times return to US$1. Nonetheless, in Could this 12 months, a distinct actuality panned out. 

luna value
LUNA’s worth fell from US$90 to virtually US$0 between Could 7 and Could 11, 2022 / Screenshot of CoinMarketCap

Upon experiencing a particularly excessive quantity of sell-offs, UST’s value started to lower. Instantly, customers started changing UST to LUNA to utilize the arbitrage alternative. 

Sadly, the algorithm couldn’t produce LUNA cash quick sufficient to revive UST’s peg. This brought on additional panic and accelerated the UST sell-off. On the similar time, customers started to additionally promote LUNA cash because of the quickly growing provide. 

Each LUNA and UST misplaced virtually all of their worth within the span of some days on account of its interconnected nature, inflicting what they name a “demise spiral”. This isn’t to say that each one algorithmic stablecoins are doomed for failure, however they do certainly include dangers which could not be readily obvious. 

Since they don’t seem to be backed by any collateral, these stablecoins are solely as sturdy as their underlying sensible contracts. Any weaknesses of their algorithms might be exploited by customers or inadvertently triggered by market volatility. 

The Terra incident has surfaced the significance of getting and practising frequent funding habits – realizing what you’re investing in, solely investing what you’ll be able to lose, particularly for property with increased volatility like cryptocurrencies. 

The way forward for stablecoins

After wiping out over US$17 billion in worth, the LUNA/UST crash introduced stablecoins to the eye of regulators world wide. 

japan stablecoin
Japan passes legislation to control stablecoins, defending crypto buyers / Picture Credit score: PYMNTS 

In June, Japan handed a key laws underneath which solely licensed corporations might be allowed to situation stablecoins within the nation. It’ll be crucial for the stablecoins to be linked to the Japanese Yen or one other authorized tender, and corporations may even want to supply a assure of full redemption. 

The UK is planning on regulating sure stablecoins underneath its funds framework. The goal is to make these cryptocurrencies protected and steady sufficient for client use. 

In Singapore, the MAS believes that almost all stablecoins don’t meet the factors to be labeled as e-money. Even fiat-backed cash – though extra steady than their algorithmic counterparts – file value fluctuations when buying and selling on totally different exchanges. 

Nonetheless, as seen with Xfers’ XSGD token, the MAS recognises the potential for stablecoins to function e-money upon assembly the designated standards. 

As international locations provide you with their very own regulatory frameworks, it stays to be seen how stablecoins will play a job in shaping the way forward for cross-border transactions. 

It’s key to at all times know what you’re investing in; it is among the some ways to cut back your threat! To be taught extra about stablecoins, head over to one-stop crypto training hub Luno Uncover, and subscribe to Luno’s Telegram channel for bite-sized crypto updates.

This text is a part of a six-part sequence to a no-hype newbie’s information to crypto. You possibly can try the opposite articles right here: 

Half One: Blockchain and cryptocurrencies
Half Two: Kinds of cash and the right way to DYOR 
Half Three: NFTs, DeFi and metaverse

This text is written in collaboration with Luno.

This partnership between Vulcan Put up and Luno is for instructional functions solely. Luno Singapore has been awarded in-principle approval from the Financial Authority of Singapore (MAS) underneath the Fee Companies Act 2019. Cryptocurrency is a high-risk funding. The worth of cryptocurrency can fluctuate considerably and it’s possible you’ll lose the capital you make investments. Earlier than investing, we urge you to teach your self about cryptocurrencies and to familiarise your self with the dangers concerned, that are detailed in Luno’s Danger Warning.


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Cryptocurrencies have lengthy been characterised by volatility. Way back to 2013 – when Bitcoin rallied from US$550 to US$1,200, and again all the way down to US$800 in a matter of weeks – it grew to become obvious that there was a necessity for a extra steady type of cryptocurrencies within the crypto area. In…