Stablecoins are cryptocurrencies designed to maintain a stable value. The price of stablecoins is tied to real-world assets, usually fiat currencies such as the US dollar. The most popular and famous of these coins is Tether (USDT), which has become a link between the traditional economy and the crypto market.
USDT (Tether) is the most capitalized stablecoin in the crypto market. The two versions of USDT–USDT-BEP20 and USDT-ERС20–are identical on centralized exchanges. But when it comes to using DetApps, the differences become more than obvious.
USDT is a popular stablecoin and the most famous of its kind. It is backed by real money, but it has some negative aspects. The fate of USDT depends too much on a central authority, so it is not a truly decentralized cryptocurrency.
It’s logical to create a stable-value cryptocurrency, and that’s what we did.
Advantages and disadvantages of decentralized solutions
To address the shortcomings of centralized assets, new digital tokens were created with built-in safeguards to lower risk.
Pros of algorithmic stablecoins
Stablecoins are backed by cryptocurrency reserves that are held on the blockchain, allowing anyone to track the location of the funds and verify that the stated amount matches the actual amount in reserve.
However, the effectiveness of these restrictions depends on their careful design.
Unlike other stablecoin protocols, algorithmic stablecoins do not have the ability to block user addresses or seize assets from non-custodial wallets.
Such platforms run on open-source code and are often run by decentralized autonomous organizations (DAOs), a type of company that has yet to receive significant regulatory pressure.
Decentralized assets do not require trust in the issuer. Any wallet owner can receive a stablecoin if certain conditions are met. For example, it might be necessary to prove that you have invested in a certain amount of collateral or delayed interest payments
Even if the DAI development team stops working on the project, the platform will continue to operate normally.
Cons of algorithmic stablecoins
Although algorithmic and centralized assets have a common problem with price volatility, the reasons for it vary. With centralized assets, the issuer is usually to blame; with decentralized stablecoins, technical risks are more prevalent.
Vulnerability to hacking
Blockchain infrastructure and smart contract solutions are still subject to hacks. Recent examples include the collapse of the DEI stablecoin after a $6 million hack, which resulted in its disappearance.
While stablecoins are the most commonly targeted DeFi services, other decentralized finance projects can be susceptible to hacks as well. Even centralized assets can be at risk if they store your tokens.
Complete reliance on the crypto market
Decentralized stablecoins are minted using cryptocurrency as collateral. However, in a volatile market with high correlations between different asset classes, the ability to diversify reserves is reduced. Leading projects are using real-world assets and advanced elimination algorithms to offset this risk.
Insufficiently effective mechanisms for maintaining binding
Seigniorage, a common money creation mechanism, has proven ineffective in maintaining price stability in a declining market. For example, Terra (UST)’s use of seigniorage led to an increase in the currency’s supply and a decrease in its value.
To escape this situation, we need to develop a new model that will consider the specifics of the cryptocurrency market and its assets. An example of such an innovative mechanism is LLAMMA. However, this mechanism has yet to be proven effective.
To avoid making the wrong choice, you need to study the asset that interests you and compare its capabilities with your own priorities, goals, and resources. It is also worth remembering that diversification is essential when investing in any asset class.