The central theses
- The high market cap of stablecoins demonstrates their importance to the broader crypto market.
- Due to their low volatility, stablecoins are suitable as collateral or to settle trades.
- Phemex recently added several new trading pairs to its platform. The new pairs are focused on DeFi ecosystems.
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Stablecoins reinforce the connection between traditional financial and crypto markets. This is because borrowing, lending and trading require a stable underlying asset.
Stablecoins are a type of cryptocurrency that track the price of another asset, such as a fiat-based currency. There are several mechanisms that allow stablecoins to attach their value to that of traditional currencies.
Helps reduce volatility
Stablecoin supply exploded in 2021 and continues to grow as new participants enter the space. Accordingly BloombergAs of February 2022, the total market cap of stablecoins was nearly $180 billion. To add context, only BTC and ETH have larger market caps. Two of the top 10 coins in crypto by market cap are stablecoins. This is a sign of their relevance in the industry.
Stablecoins are essential for a number of reasons. They are predominantly used as collateral for lending crypto assets and also as a tool to settle trades. Additionally, stablecoins help delay taxable events since crypto does not need to be sold for fiat currency.
As a form of security, whenever users deposit a stablecoin on a lending and lending platform, they receive a token representing the deposit position.
Using stablecoins for this purpose is beneficial as stablecoins can have extremely low liquidation rates due to their price stability. This means users do not have to risk losing their collateral due to market volatility.
As a trade execution tool, stablecoins allow traders to enter and exit their positions without withdrawing their funds or going back to fiat. Traders do not have to wait between trades and can mitigate the risks of price fluctuations by holding their profits in a dollar-pegged asset.
Although Tether’s USDT accounts for over 60% of the total stablecoin market cap and is the most commonly used stablecoin, there are other competing stablecoins worth noting. One can learn about different design mechanisms, how different stablecoins are issued and how they maintain parity with a stable value.
Phemex is pleased to announce that a portion of this variety of stablecoins are now available for trading on its platform. Phemex added stablecoins like FEI, TUSD, USDP, DAI and PAXG.
And as the number of stablecoins available in the market increases, it is important to further investigate how these coins can achieve stable pegging. We will briefly touch on FEI and TUSD.
FEI is an algorithmic stablecoin that seeks to avoid the regulatory risks and single points of failure of fiat-backed stablecoins. FEI also seeks to address scalability issues inherent in crypto-collateralized stablecoins like DAI.
The Fei protocol uses an innovative system to maintain its binding and try to ensure the stability of the protocol.
When the price of FEI is above $1, the protocol allows users to mint new FEI directly from the system at a discounted rate, using ETH as payment. Traders can then arbitrate the price down until the price hits its $1 peg. When the price of FEI is below $1, the protocol by selling the token shrinks the supply of FEI. In other words, (by the design of the protocol) FEI sellers trigger the removal of FEI from the existing supply and grant buyers additional FEI (on top of their original purchase). The trading algorithm ensures that the burn amount exceeds the amount buyers would receive.
This system of regulating supply while achieving price stability is known as the Bonding Curve Sale. In this case, the curve approaches and fixes the one-dollar peg.
The FEI protocol uses Protocol Controlled Value (PCV), a subset of the TVL concept (Total Value Locked). When Fei (the protocol) buys ETH from users with newly minted FEI, that ETH is used to support the PCV pools.
PCV gives the protocol more flexibility to engage in non-profit activities. These activities can be geared towards more fundamental goals, such as: B. Maintaining stability in the bracket. Examples of PCV features include treasury governance, insurance funds, and a price backstop for DeFi users.
On the other hand, we have TUSD (TrueUSD), a centralized fiat-backed stablecoin. Each TUSD is backed by one US dollar held in reserve. Users can mint TUSD and redeem USD at any time with a 1:1 ratio on the TrueUSD website.
On the secondary market, the price of TUSD can fluctuate slightly depending on the supply-demand ratio of the market. Arbitrageurs can take advantage of these swings by buying TUSD once it falls below its peg and exchanging it for $1 on the TrueUSD website.
Both FEI and TUSD are part of the new spot trading pairs Phemex listed on March 14, 2022.
This quarter, Phemex’s primary business focus is to increase its listing capacity (in addition to its existing 142+ spot trading pairs) to prepare for another exciting DeFi season and grant clients more popular tokens to trade.
The new token lists are:
DAI, CVX, AMP, SPELL, TEL, FEI, FXS, TRIBE, RGT, WBTC, TUSD, USDP, RSR, POLY, UMA, DAO, BNB, CAKE, CRV, LRC, 1INCH, BNT, ZRX, PERP, C98 and KNC.
Before adding new assets to its platform, Phemex conducts due diligence by conducting extensive research on trading volumes, token popularity and projects, and the demands of its community.
To prepare for the new DeFi season and learn about different trading strategies without risking your own capital, visit the Phemex crypto simulation trading platform for more informations.
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