Bitcoin Stablecoins: A Guide for Professional Investors
July 2, 2023
Stablecoins are often not associated with Bitcoin due to its blockchain’s limited programmability. But the Bitcoin ecosystem does have its fair share of stablecoins. Read on to discover what Bitcoin stablecoins are and the various examples that exist today.
What Are Stablecoins?
Stablecoins are digital currencies whose price is pegged to price-stable assets like fiat currencies or gold.
For instance, a stablecoin pegged to the US dollar is generally valued at $1 if everything is working as it should. You can liken such a coin to a tokenized representation of the US dollar.
Stablecoins exhibit much lower volatility compared to standard digital assets as they are tied to a stable asset. This ensures that they do not undergo unpredictable price fluctuations, enabling investors to store the value of their digital asset holdings during periods of high volatility.
In essence, stablecoins serve as a bridge between cryptocurrency and fiat money, offering users the advantages of both.
Although the primary goal of all stablecoins is to reduce volatility, they are not created equal. There are various types of stablecoins based on their methods of achieving stability.
For example, a stablecoin that relies on a trusted third party to maintain its peg is centralized, whereas one that uses a smart contract and other crypto assets for collateralization is considered decentralized.
What Are Bitcoin-Based Stablecoins?
Bitcoin stablecoins are price-stable cryptocurrencies (typically pegged to the US dollar) that operate within the Bitcoin ecosystem.
Because the Bitcoin network has limited programmability, developers have created stablecoins on layer-2 Bitcoin networks like Stacks, the Liquid Network, and Rootstock (RSK). Each layer hosts the applications where these stablecoins can be used. Nevertheless, all stablecoin transactions are ultimately tied to the Bitcoin mainchain in some way or another.
While some Bitcoin stablecoins have existed previously, the recent emergence of the Ordinal Theory has also brought stablecoins to the Bitcoin blockchain directly.
Ordinal Theory is a methodology for identifying and tracking serially numbered individual satoshis (sats) throughout the current Bitcoin supply. This protocol allows anyone to associate various types of content, such as videos and images, with a specific satoshi. The Ordinal protocol utilizes the SegWit upgrade of 2017 and the Taproot upgrade of 2021.
Popular Bitcoin-Based Stablecoins
Now, let’s take a look at some of the most popular stablecoins operating on Bitcoin layer-2 protocols.
Dollar on Chain (DoC) is an RSK-based stablecoin collateralized by Bitcoin, maintaining a 1:1 USD peg. The utilization of collateral provides an extra layer of stability for the stablecoin and is locked in a smart contract.
Notably, DoC distinguishes itself from other stablecoins tied to the US dollar by storing the collateral directly in Bitcoin (or rather Bitcoin’s sidechain RSK) rather than relying on intermediaries such as banks. This arrangement effectively safeguards users against institutional counterparty risk.
DoC is one of the tokens used on the decentralized Money on Chain protocol. It helps Bitcoin holders avoid BTC volatility. DoC was introduced in 2019.
Liquid Tether (L-USDt) is a USD-pegged stablecoin. It maintains a 1:1 with USD and is fully backed by a diverse range of reserve assets held by intermediaries. As stated on the Tether website, these reserve assets include cash, cash equivalents, BTC, precious metals, corporate bonds, secured loans, and other investments. Tether Limited launched the popular stablecoin on the Liquid Network in 2019. With L-USDt, users can benefit from private and fast transactions offered by the Liquid Network while enjoying the reduced volatility of a stablecoin.
Brazilian Digital Token (BRZ), created by Transfero in 2019, is a stablecoin on the RSK Network pegged 1:1 to the Brazilian real. You can mint BRZ tokens by depositing reais into a smart contract. On the other hand, BRZ tokens are burned when redeeming Brazilian reais. BRZ enables holders of Brazilian reais to enter the crypto market without worrying about wild price swings.
Stably USD (#USD) is a Bitcoin-native stablecoin pegged 1:1 to the US dollar. It was started in May 2023 by Stably, a stablecoin-as-a-service provider. #USD is a BRC-20 token, which means it's minted on the Bitcoin blockchain directly. The BRC-20 token standard was created using the Ordinals protocol in March 2023.
According to a Twitter announcement, the USD backing up Stably USD is managed by a US-regulated custodian. #USD is supposed to help encourage the use of DeFi applications built on the Bitcoin blockchain.
USDA is a stablecoin with a soft peg to the US dollar. It is generated when users lock their STX tokens (Stacks’ native digital currency) as collateral on the Arkadiko protocol. In this process, users borrow USDA and lock STX as collateral in a vault. Borrowers are required to overcollateralize their loan to mint USDA. Arkadiko is built on Stacks, a Bitcoin layer-2 network. USDA was introduced in 2021 with the launch of the Arkadiko protocol.
Why Stablecoins on Bitcoin May Be Superior
Bitcoin is by far the most secure and decentralized blockchain in existence today. Consequently, stablecoins issued on Bitcoin layer-2 networks benefit from this robust security, making them more secure than those minted on less reliable chains.
Moreover, Ordinal Theory has also made it possible to mint stablecoins directly on the Bitcoin network. Although the serialization of satoshis through Ordinal Theory doesn't occur at the protocol level, assets created using the Ordinals protocol still settle on the Bitcoin base layer. As a result, stablecoins created through the Ordinal Theory are backed by the security of the Bitcoin blockchain.
While the Bitcoin stablecoins market is still relatively small compared to stablecoins on other crypto networks, we can expect this market segment to grow as more use cases are coming to the Bitcoin network thanks to the growth in layer-2 protocols and the recent emergence of Ordinal Theory.
Is Bitcoin a stablecoin?
No. Bitcoin is not a stablecoin. A stablecoin is a digital currency pegged to a fiat currency or commodity to make its price less volatile. Unlike stablecoins, Bitcoin doesn’t maintain a peg to another asset. Stablecoins are a blend of fiat money and digital currencies, combining the benefits of both. They can be traded on the blockchain 24/7, while the fiat peg provides stability.
What’s the difference between stablecoins and Bitcoin?
Firstly, stablecoins are pegged to a stable asset like fiat money or gold, while Bitcoin isn't. Bitcoin is purely backed by math. Secondly, Bitcoin is more volatile compared to stablecoins. Since stablecoins are pegged to stable assets like fiat or gold, they are less volatile, protecting holders from wild price swings. Thirdly, stablecoins don’t have a capped supply like Bitcoin. They are instead minted based on market conditions.
What is the most popular use of stablecoins?
Investors can utilize stablecoins to safeguard the value of their digital asset holdings during times of heightened volatility. As such, stablecoins are popular means to store value.
Moreover, stablecoins play an important role in DeFi. For instance, it’s less risky for borrowers to use a stablecoin as collateral because its price is supposed to remain relatively stable. This reduces the chances that borrowers face liquidation due to sudden drops in asset prices, thereby ensuring their loans remain adequately collateralized.