XSGD

StraitsX Academy #2: What is a stablecoin & how do they work?

February 24, 2022

Key takeaways

Stablecoins are digital assets pegged to other assets to maintain their value
Stablecoins offer price stability when transacting
Stablecoins provide faster transaction times and lower fees compared to traditional Forex
Stablecoins provide a stable alternative when investing compared to regular cryptocurrencies
Stablecoins have four different types: fiat-collateralised, commodity-collateralised, cryptocurrency-collateralised, and algorithmic
Get XSGD and XIDR stablecoins quickly & easily on StraitsX

By the end of 2021, centralised digital assets exchanges reported trading volumes of more than US$14 trillion, compared to a mere US$1.8 trillion in 2020. The 689% increase comes as no surprise as mainstream adoption of cryptocurrencies and other digital assets soared over the years, with low barriers of entry to many bright-eyed casual investors. 

Among more than 10,000 digital assets, stablecoins like the USD Coin (USDC), StraitsX Singapore Dollar (XSGD) and Indonesian Rupiah (XIDR) are popular and widely-adopted, thanks to their stability in the volatile digital assets market.

What is a stablecoin?

A stablecoin is a digital asset that is designed to maintain its value by pegging it to another asset.

These coins seek to achieve this level of stability by tying the coin’s value to existing assets such as fiat currencies, commodities, other cryptocurrencies, or through algorithms. They are generally considered a release valve for volatile cryptocurrencies, allowing users to move in and out of different cryptocurrencies or transact with other digital assets like NFTs, without a significant impact on price.

For example, one USDC can always be redeemed for one US Dollar, giving it a stable price. Similarly, one XSGD and one XIDR can always be redeemed for one Singapore Dollar and one Indonesian Rupiah respectively on StraitsX.

What is a stablecoin used for?

Imagine paying for a non-fungible token (NFT) with Bitcoin (BTC) or Ethereum (ETH), but the value of these cryptocurrencies change everyday. Their inherent value is speculative, which makes it unsuitable for regular transactions.

Stablecoins negate this problem by offering price stability.

Stablecoins can also act as a more efficient version of Forex, where users can swap between trading pairs such as XSGD/USDC, XIDR/USDC, XSGD/XIDR at faster speeds and lower transaction fees.

Similarly, stablecoins are advantageous for investors – they can pool their stablecoins on Decentralised Finance (DeFi protocols) to provide liquidity for other investors, and reap high yields in the process. Unlike stock markets, DeFi protocols or centralised digital assets exchanges do not close after a certain time. They operate 24 hours a day, 7 days a week. With stablecoins, investors can move their money in and out at a moment’s notice, as well as between cryptocurrency to exchanges globally without exiting to fiat

This is as good as holding a part of your digital assets portfolio in cash, where you can buy a cryptocurrency or other digital assets such as NFTs immediately, without the tedious transferring process.

What are the different types of stablecoins & how do they work?

There are four types of stablecoins:

Fiat-collateralised stablecoins

When you think of the word “stablecoin”, the first few that you think about are probably USDC, XSGD, and XIDR, among many others. Such stablecoins are backed (or collateralised) at a 1:1 ratio with a fiat currency like the US Dollar, the Singapore Dollar, or the Indonesian Rupiah. Theoretically, for each stablecoin that is minted, there should be real fiat currency safeguarded in a bank account behind it.
This is the case for XSGD and XIDR, which are fully backed by their respective fiat currencies at a 1:1 ratio. The fiat backing XSGD and XIDR are safeguarded in a regulated financial institution.

Commodity-collateralised stablecoins

As its name implies, commodity-collateralised stablecoins are backed by physical assets such as precious metals, oil, and real estate.  Unlike fiat-backed stablecoins, commodity-collateralised stablecoins such as Digix (DGX) or Paxos Gold (PAXG) are more prone to price fluctuations due to the fluctuation of the underlying asset.

Cryptocurrency-collateralised stablecoins

The idea behind a cryptocurrency-collateralised stablecoin is to maintain the value of the asset that it is pegged to, since the underlying asset might be volatile. This is done by over-collateralising the underlying asset of the cryptocurrency-collateralised stablecoin.

For example, Dai (DAI) is a stablecoin that attempts to maintain a stable 1:1 value with the US Dollar. However, unlike USD Coin which is backed by the US Dollar held in a regulated financial institution, Dai (DAI) does it by over-collateralising Ethereum-based assets in a smart contract. This helps Dai maintain a close-to 1:1 value to the US Dollar.

Algorithmic stablecoins

Algorithmic stablecoins are backed by an on-chain algorithm that manages the supply of stablecoins in circulation by minting or burning collateral. The collateral is usually based on other digital assets. This ensures that the supply of stablecoins remain constant, hence, achieving price stability whilst maintaining scalability, relative to other methods of collateralising.

Such an example would be TerraUSD (UST). TerraUSD (UST) uses Luna (LUNA), Terra’s native cryptocurrency, as collateral. To mint one TerraUSD (UST), you would have to burn US$1 worth of Luna (LUNA) tokens on the Terra blockchain network.

Are stablecoins safe?

Stablecoins offer users a host of benefits such as price stability, time efficiency, lower fees, and many others. This is reflected by the growing market cap of stablecoins – it has grown from around US$1 billion in 2018 to more than US$160 billion by the end of 2021. 

Bitcoin (BTC), Ethereum (ETH), and other similar cryptocurrencies like Cardano (ADA), Solana (SOL), and Terra (LUNA), among many others, remain too speculative and volatile for general use as a medium of exchange by the public. They can lose or gain considerable value in a matter of hours. 

This is where stablecoins come in. In the case of XSGD and XIDR, they are pegged to a fiat currency and are guaranteed a fixed 1:1 exchange rate between their tokens and fiat currencies. Every XSGD and XIDR is backed by a Singapore Dollar or Indonesian Rupiah that is safeguarded in a regulated financial institution.

How do I mint my own XSGD or XIDR stablecoin?

StraitsX lets you enjoy the benefits of stablecoins: get, swap, and redeem XSGD and XIDR with other stablecoins within the StraitsX Ecosystem and our DeFi partners.

  1. Sign up for a StraitsX Personal Account or StraitsX Business Account.
  2. Upload the required documents to verify your identity.
  3. Make a Transfer In from your bank account to mint XSGD or XIDR.
  4. Create your own non-custodial wallet with our partners to Transfer Out your XSGD or XIDR
  5. Visit one of our DeFi partners: DFX, Uniswap, and Zilswap to put your XSGD or IDR to use.
  6. Swap your XSGD or XIDR on DFX, Uniswap, and Zilswap for various other stablecoins such as USDC, EURS, and more.
  7. Alternatively, pool your XSGD or XIDR to reap attractive yields with low slippages.

Note: If you are a high net worth individual, or institution, you can take advantage of StraitsX’s OTC Desk feature that offers deep liquidity and OTC block trades.

StraitsX and our DeFi partners are specially catered to our Indonesian and Singaporean users with our native support of XSGD and XIDR. This allows our regional investors to trade in their home currency to minimise transaction fees and slippages, instead of, traditionally, with the US Dollar (USD) that carries conversion fees. 

Ready to get started?

Mint and redeem StraitsX stablecoins, manage payments, view transactions and more.