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How Safe Are Stablecoins Part 3 – Crypto & Commodity Collateralized Coins
The question we aim to answer is how safe and stable are stablecoins? We will be covering crypto and commodity backed stablecoins in this episode. Are stablecoins backed by cryptocurrencies or gold any better than fiat or algorithmic stablecoins?
Well, the answer depends on what you want. If you are looking for something pegged to the dollar, you may have a better time with fiat backed stablecoins. If you want to stay in the realm of crypto but you want a coin that’s more stable to use for buying things, a crypto collateralized coin like DAI may be a good option for you. If you want something backed by a commodity and simply want exposure in crypto to real world assets like gold, you can invest in something like PAXG or XAUT.
Like fiat collateralized stablecoins, these coins are supposed to be backed 1:1 but instead of fiat it’s by various cryptocurrencies. Sometimes, it’s just one cryptocurrency and other times it’s a pool of them. It can either be pegged to $1 still like DAI or be pegged to something else entirely like wrapped Bitcoin on Ethereum.
The main advantage of crypto-collateralized stablecoins is that they offer you exposure outside of just fiat and let you stay more within the realm of crypto. Beyond that, they also offer more options for decentralization as they may not require an entity like Tether to back their currency and can utilize a DAO like DAI.
More decentralization means less ability to control the funds, so they are more vulnerable to hacks. Being crypto backed means, it may also not be as reliable in a crypto bear market.
DAI is upheld in a decentralized way by the MakerDAO to prevent any one entity from having control over it. To keep its peg to $1, DAI is an ERC20 token that requires users to over-collateralize their cryptocurrency. This means that for example, with a 150% over collateralization, you need $100 worth of ETH to create 66 DAI worth $1 each. This ensures there is more ETH in the ecosystem to back DAI in order to maintain the peg.
While it seem similar to algorithmic stablecoins, it’s actually fully backed by cryptocurrency and doesn’t rely on community incentives. There is a required 1:1 backing to achieve this. The main benefits to something like DAI are being able to use a stablecoin that isn’t centralized, though you need to be confident in the underlying assets it holds too. You can see the collateral lists at http://mcdstate.info/ & https://daistats.com/#/.
From these two sites you can see the cryptocurrencies backing DAI. It’s important to note that USDC is the majority of the collateral that makes up DAI meaning it does have a bit too much exposure to traditional fiat-backed stablecoins. One could argue this defeats the purpose of using a crypto-backed stablecoin if it still relies heavily on fiat.
You also have to spend ETH gas fees to use DAI, so keep that in mind too. The price is also more likely to fluctuate and not always perfectly maintain the $1 peg. There is also the risk that the DAO gets hacked or there is some sort of issue that only a centralized entity could solve. The benefit of something like Tether in comparison is they can freeze stolen funds and just revert things back to before they were hacked as an example, but this is at the cost of giving them total control of your funds. However, given USDC is so heavily concentrated as collateral, there is a chance that they could negatively impact the value of DAI too.
While I don’t really trust most stablecoins, DAI is probably one of the better options.
Wrapped Bitcoin is an interesting version of a crypto backed stablecoin as it’s not pegged to the dollar, but rather it’s an Ethereum ERC20 token that’s pegged to Bitcoin. The idea is that you can use Bitcoin combined with the functionality of Ethereum. I’m personally not a fan of wrapped tokens because I’d rather stick to the native cryptocurrencies, but the idea is to provide more versatility and build cross chain solutions.
With something like WBTC, you could lend Bitcoin in a decentralized way through smart contracts, which you previously couldn’t do. The process of swapping between BTC & ETH is done via burning and minting tokens back and forth.
The management of WBTC on Ethereum is an open process controlled by a multi-signature contract. The keys to the contract are held by institutions part of the WBTC DAO. So, there is still some risk within the DAO, but it’s one decentralized solution you can take advantage of.
Commodity-collateralized stablecoins are those that are backed by physical good commodities like gold that are held by a central entity. Like a fiat backed stablecoin, they are supposed to store the commodity and back their cryptocurrency at a 1:1 ratio. While there are some examples outside gold and it’s possible to tokenize anything, we will mainly talk about gold examples to keep things simple.
Gain exposure to more stable assets while staying in the crypto realm and maintain the ability to buy cheap fractional physical assets and hold them in a decentralized way.
You still need to trust a centralized entity to not mismanage or lie about the backing of their commodity-backed assets. You still need to rely on the underlying asset so it may not necessarily be stable in comparison to other stablecoins, but it will still ideally accurately reflect the value of that asset. There aren’t very many reliable projects that tokenize real world assets that I would be confident enough in to use instead of buying the real world asset or just holding cryptocurrency like Bitcoin. They also tend to have low liquidity and aren’t trading on many exchanges.
Most gold tokens are currently listed as ERC20 tokens, so you are going to have to rely on one network and pay Ethereum gas fees too. Some of the most popular gold tokenized coins are XAUT, DGX, PAXG, GLC, and PMGT
These were the same coins I covered 2 years ago, so not much have changed in the world of crypto gold. They are still struggling with low liquidity. For example, XAUT can only be traded on centralized exchanges. XAUT and PAXG have marketcaps from 400-600 million while DGX, PMGT, and GLC only range between 1 and 2 million and are pretty unreliable regarding liquidity.
PAXG is the only popular crypto gold token that can be traded in a decentralized way or at least on a non-KYC required centralized exchange. It’s lacking liquidity on Uniswap, so again it’s not super ideal for decentralized trading, but they have some options that the others don’t really offer. This really limits your options, but if you were to opt into crypto gold, this is likely the best option.
Personally, I think you’re better off just holding Bitcoin which in my mind is the true crypto digital gold, but to each their own.
Do you hold any crypto collateralized or commodity backed stablecoins? Do you trust that they are backed 100%? Do you trust any of these entities? Let me know what you think about this in the comments below and don’t forget to subscribe!
*Disclaimer: This is not financial advice and is purely for entertainment purposes. What you see, hear, or read is my personal opinion, and any statements made are based on my views and should not be misconstrued as fact. My crypto portfolio may or may not be simulated*