What is a Stable Coin? Introducing its Representative USDT
Recently the word “stable coin” has come to be frequently said in the crypto currency world. What is a stable coin?
Stable coins are coins with less price fluctuation
As the name suggests, a stable coin is a coin that is ‘stable’ under the English definition. In other words, it is a coin where the price is stable.
In general, crypto currencies are still problematic due to their price fluctuations (volatility). There are still too many problems for crypto currencies to be an “exchange of value” or a “preservation of value.” That’s where stable coins come into play. Stable coins can stabilize prices by pegging (interlocking) specific assets, thus locking in specific prices for users.
Stable coins subject to pegging
There are two mains types of objects to be pegged with stable coins:
- legacy currency：USD、EUR、JPY etc
Although price fluctuation is not zero in both cases above, price fluctuation is much less than crypto currencies like Bitcoin.
Advantages and disadvantages of stable coins
Advantages and disadvantages do exist with stable coins. An advantage is that the price is still stable. Normally, when trading on Japanese crypto currency exchanges, the legal currency of yen used for finalizing profit and cutting off losses. In addition, the yen is used as an evacuation currency at the time of price crashes. However, overseas currencies may not handle legal currencies. Therefore, users can stabilize their trading balances by using stable coins.
The representative of stable coins – USDT
One of the main stable coins is USDT. On overseas exchanges, USDT is widely adopted like BTC as a trading pair and is utilized as a settlement currency. As the name implies, USDT will be USD, a stable coin pegged to the US dollar ($). That price is kept at 1 USDT = 1 USD.
How is it possible to peg USDT with the USD?
USDT is issued by Tether, a company. When issuing USDT, Tether possesses the same amount of USD as USDT in circulation. In other words, USDT is like a USD deposit issued by Tether. Because “USDT USD deposit” can be exchanged for 1 USD, it will be worth equivalent to 1 U
Suspicion surrounding USDT
Theoretically 1 USDT = 1 USD with the above contents, but in reality, allegedly the USDT repeatedly a questioned with is “1 USDT = 1 USD actually true?” This is a question yet to be resolved.
The major premise is the fact whether Tether actually holds the same amount of USD as USDT issued for 1 USDT to equal 1 USD. For example, if Tether has only 500,000 USD despite issuing 1 million USDT, the value of 1 USDT will be 0.5 USD. Normally, stable coins include an external audit of an auditor to examine the value of the assets that are backed. However, Tether’s relationship with the auditor Friedman LLP was terminated in January 2018, keeping it a mystery about the accuracy of what USD holdings they actually have. After that, a separate legal firm confirmed Tether’s USD holding amount, followed by a confirmation from Bloomberg, which still was confirmed in an informal manner by both parties.
This suspicion remains unresolved as an auditor has not performed a complete audit on Tether’s USD holdings. This has led to a flow of transition into stable coins (TUSD, USDC, GUSD, PAX, etc.), coins that also claim to have a pegging to the USD but with higher transparency on world exchanges.
Stable coins are crypto currencies that are pegged to legal currencies or commodities. The most famous stable coin is USDT, which is supposedly pegged to the USD, but since there is suspicion whether its value is true or not, the shift to other stable coins has begun globally.