Blockchain technology, which powers various volatile cryptocurrencies, also serves as the foundation for the development of Stablecoins. These digital currencies provide a reliable and consistent value, distinguishing them from their highly fluctuating counterparts.
In this guide, Cryptocurrency NZ will delve into the history and features of Stablecoins in New Zealand – and help gauge which is the best stablecoin to use in New Zealand.
What are Stablecoins in NZ?
In New Zealand, a stablecoin refers to a type of cryptocurrency designed to maintain a stable value. It offers a reliable alternative to the volatile nature of cryptocurrencies.
Stablecoins are particularly appealing for individuals and businesses in New Zealand seeking the benefits of digital currencies, such as fast and secure transactions, without being exposed to significant price fluctuations like Bitcoin and Ethereum.
This comprehensive guide will equip you with all the Stablecoin basics, exploring its history and defining features, such as smart contracts, and detailing its many use-cases.
Why are Stablecoins so Important?
Bitcoin, being the most well-known cryptocurrency, has faced significant price volatility, which can be concerning for routine transactions and everyday use. For instance, its value soared from just under $5,000 in March 2020 to over $63,000 in April 2021, only to experience a subsequent decline of nearly 50% in the following months.
To address this issue, stablecoins have emerged in the crypto market. These cryptocurrencies, with a focus on stability, aim to maintain a steady value using various methods. Stablecoins are particularly relevant to the New Zealand crypto landscape, where individuals are keen to explore digital currencies while ensuring stability.
Stablecoins, as the name suggests, seek to tackle this challenge by offering methods to maintain a consistent value for the cryptocurrency they represent.
What Kind of Stablecoins are there in NZ?
Presently, Stablecoins command a collective market capitalization of $100 billion, signifying their significant presence. Their utilization spans across various purposes, including cryptocurrency trading, earning interest through Decentralized Finance (DeFi) applications, and safeguarding wealth from the volatility of local currencies.
Crypto-Collateralized Stabelcoins
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With the rising popularity and adoption of cryptocurrencies, the number of individuals holding crypto assets has surged significantly. This growing trend has led to an increased interest in utilizing cryptocurrencies as collateral to generate Stablecoins.
The process of collateralizing and issuing Stablecoins with crypto assets is relatively straightforward. Kiwis can deposit their crypto into a stablecoin vault, such as MakerDAO, and then generate Stablecoins, such as DAI, against the value of their collateral.
As the loan is repaid and the collateral is withdrawn, the corresponding amount of Stablecoins, such as DAI, is removed from circulation. Individuals can tap into the value of their assets while retaining ownership and potential long-term appreciation.
Fiat-Collateralized Stablecoins
Currently, dollar-pegged stablecoins dominate the stable digital currency landscape, enjoying immense popularity. These stablecoins maintain a 1:1 value ratio with the US dollar, as they are backed by actual dollar reserves, effectively acting as digital counterparts to physical dollars.
Tether (USDT) emerged as the initial digital dollar stablecoin to achieve widespread acceptance and has now become ubiquitous across various cryptocurrency exchanges.
Traders extensively utilize Tether and other widely recognized digital dollars like USDC. These Stablecoins offer the convenience of swiftly transferring funds between crypto wallets, ensuring funds are readily available for seizing market buying opportunities, or easily converting them back to NZD dollars when desired.
Algorithmic Stablecoins
Algorithmic Stablecoins differentiate themselves from reserve-backed models like Tether and Maker. Instead of relying on reserves of collateralizing assets, algorithmic stablecoin protocols actively participate in the open market by buying and selling their token.
A famous example is Terra’s USD. They utilizes a distinctive mechanism that encourages arbitrage activities involving USD and Terra’s LUNA token. In cases where USD exceeds the $1 peg, the stabilization mechanism of the protocol initiates a swap where $1 worth of LUNA is exchanged for $1 of USD. TerraUSD has collapsed and is now worth $0
What is the Best Stablecoin in NZ?
With the ever-growing cryptocurrency market in New Zealand, new Stablecoins are emerging regularly. For individuals seeking secure, reliable, and popular Stablecoins, here is an overview of some of the top choices that Cryptocurrency NZ recommend.
Interested in buying Stablecoins? Check out our How to Buy Cryptocurrency in NZ Guide.
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DAI
DAI is an Ethereum-based decentralized stablecoin created by the Maker DAO protocol. To generate DAI, individuals can deposit ETH into Maker’s reserve vault. The value of DAI is designed to be pegged to the US dollar, ensuring stability.
USDT
Tether (USDT) has had a tumultuous and contentious journey within the cryptocurrency realm. However, despite its controversial past, it has emerged as the most widely adopted stablecoin. USDT is pervasive as a dominant trading pair across various platforms and exchanges in the crypto space.
USDC
USDC is a stablecoin developed by Circle, a payments company with support from Goldman Sachs. The primary objective of USDC is to serve as a high-quality digital currency for institutional use, offering a reliable and regulated infrastructure along with a dollar reserve ratio of 1:1.
BUSD
While USDC has emerged as Coinbase’s de facto stablecoin, Binance, a rival exchange, has introduced its own official stablecoin called Binance USD. BUSD isn’t very popular outside of Binance, but considering the extent of Binance’s user base, the stablecoin reaches a large audience by default.
Advantages of Stablecoins
✔️ Safe Haven: Stablecoins offer a safe haven for users in the volatile crypto market. Unlike highly volatile cryptocurrencies like Bitcoin or Ethereum Stablecoins maintain a stable value, typically pegged to a fiat currency such as the US dollar or even NZD Dollar.
✔️ Borderless Payments: One of the key advantages of stablecoins is their ability to facilitate borderless payments. Traditional cross-border transactions often involve high fees, delays, and the need for intermediaries such as banks. Stablecoins, on the other hand, operate on blockchain networks, enabling fast, secure, and cost-effective transactions.
✔️ DeFi and Digital Ownership: Stablecoins play a crucial role in decentralized finance (DeFi) ecosystems. Users can leverage tokens to access a wide range of DeFi protocols, including lending and borrowing platforms, decentralized exchanges, and yield farming.
Problems with Stablecoins
❌ Centralization: Stablecoins such as USDT and USDC, which are backed by the US dollar, are administered, audited, and issued by centralized reserve bank entities. However, any scrutiny or controversy surrounding the parent company, as observed in the case of Tether, poses a risk to the entire crypto ecosystem due to interdependence.
❌ Security Concerns: Collateralized Stablecoins rely on custodians to securely hold the underlying collateral assets. This concentration of risk introduces vulnerabilities, making algorithmic Stablecoins comparatively advantageous. Nevertheless, algorithmic Stablecoins may face the challenge of being under-collateralized.
❌ Lack of Transparency: Since most Stablecoins are operated by centralized entities, a significant portion of their activities, including their backing, occurs off-chain. This opacity complicates the process of determining whether a stablecoin is fully backed, and obtaining clear answers can be challenging, leaving uncertainties in the minds of users.
Cryptocurrency NZ Final Verdict
Cryptocurrency NZ believes the cryptocurrency ideology advocates for continuous innovation rather than relying solely on existing frameworks when challenges arise. In line with this ethos, while many of the prevailing Stablecoins in the market are centralized and deeply entrenched, there is a growing momentum towards decentralized alternatives.
