Privacy Coins vs Stablecoins
The global crypto markets offer a wide range of digital currencies and tokens with various use cases. Two of the most prominent types of cryptocurrencies are privacy coins and stablecoins.
Privacy coins provide a layer of privacy and anonymity to cryptocurrency transactions by shielding transactions from prying eyes. Stablecoins, on the other hand, bring price stability to the crypto asset markets by pegging the value of a digital currency to a stable asset, such as the US dollar.
Read on to understand better what privacy coins and stablecoins are and how they differ.
What Are Privacy Coins?
Privacy coins are cryptocurrencies that safeguard people’s financial privacy and transactional anonymity by concealing transactions from unwanted third parties.
Privacy coins use privacy-preserving technology, such as zero-knowledge proofs and ring signatures, to prohibit parties not involved in a transaction from gaining sight into the activities of the sender and the receiver.
Unlike cryptocurrencies operating on public blockchains, like Bitcoin and Ethereum, privacy coins are either anonymous by default or enable you to switch on privacy-enhancing features to shield a transaction from public view.
Examples of Privacy Coins
The two most prominent privacy coins are arguably Monero and Zcash.
Monero (XMR) is the only privacy coin that is anonymous by default. You can’t turn Monero’s privacy functions off, unlike in other privacy coins. Launched in 2014, Monero’s goal is quite simple; to allow for transactions to occur with anonymity and privacy.
Monero utilizes a one-off stealth address, ring signatures, and ringCT to conceal transaction data. Ring signatures help to group legitimate transactions with old ‘camouflaged’ transactions making it hard to figure out which transactions are genuine, while ringCT hides the amount of XMR sent in each transaction.
Launched in 2016, Zcash (ZEC) is a digital currency that utilizes zero-knowledge proofs. Zcash uses zk-SNARK technology to enable different nodes on the network to confirm transactions without disclosing additional information about those transactions. That means that the transaction amounts and addresses aren’t revealed should you choose to want to keep your translation private.
Why Do Privacy Coins Exist?
A common misunderstanding in the crypto market is that most cryptocurrencies are anonymous. This is far from the truth, as bitcoin and most other cryptocurrencies are pseudonymous and not anonymous.
Monero, Zcash, and other privacy coins, on the other hand, focus on privacy, which allows people to transact anonymously without fear of interference or surveillance. This is useful if you don’t want anyone to pry on your financial activities.
What Are Stablecoins?
Stablecoins are digital currencies whose value is tied to or pegged to a fiat currency, a commodity, or a basket of assets.
Stablecoins are typically either backed by an asset (usually US dollars) held in by a centralized financial institution or by a basket of assets, including cryptocurrencies. There are also algorithmic stablecoins that aim to maintain their values using a token minting and burning mechanism.
Most major stablecoins usually have their reserves audited monthly, after which they publish an attestation. And just like with other cryptocurrencies, stablecoins can be securely stored and managed using your Trust Wallet.
Why Are They Called ‘Stable’?
Popular cryptocurrencies, such as BTC and ETH, have become less desirable for day-to-day transactions because of how volatile they can be. Although Bitcoin has retained its top spot as the most popular digital currency to date, its price suffers from regular bouts of high volatility.
While price volatility can be good for crypto traders, it makes commercial cryptocurrency transactions more challenging for consumers, businesses, and merchants.
Stablecoins seek to solve this issue by combining the stability and trust of fiat currencies, like the US dollar, with the accessibility, openness, and programmability of cryptocurrencies to provide people with a more reliable medium of exchange. In simple terms, stablecoins strive to offer a stable value that corresponds to other digital assets by having their value linked to a real-world asset, like the US dollar or gold.
Types of Stablecoins
Although leading stablecoins, such as USDT and USDC, are backed by US dollars held in regulated bank accounts, there are other stablecoins that utilize other price stabilization mechanisms. Below are four common types of stablecoins.
- Algorithmic stablecoins: these stablecoins use an algorithm (typically involving a token mint-and-burn mechanism) or code to control the coin/token’s price stability.
- Commodity-backed stablecoins: these stablecoins use real-world assets like gold or other commodities as reserves instead of other cryptocurrencies or fiat currencies. Tether Gold (XAUT), for instance, is a popular stablecoin that has gold in its reserve instead of the US dollar.
- Crypto-backed stablecoins: they use different cryptocurrencies as collateral. These stablecoins operate in a similar manner to fiat-backed stablecoins. However, the reserve that guarantees their stability is one or several cryptocurrencies. DAI is an example of a crypto-backed stablecoin.
- Fiat-backed stablecoins: unlike the other three stablecoins we have mentioned, fiat-backed stablecoins are backed by fiat currencies, such as the US dollar, and have a 1:1 ratio to the reserve fiat currency. Tether USD (USDT) and USD Coin (USDC) are examples of leading fiat-backed cryptocurrencies. Fiat-backed stablecoins are the most common and largest stablecoins by market capitalization.
Examples of Stablecoins
Below are some of the top stablecoins currently available in the market, all of which you can store, send, receive, and swap your Trust Wallet.
Tether USD (USDT)
Tether (USDT) was launched in 2014 as the world’s first stablecoin tied to the US dollar. USDT tokens are fiat-backed stablecoins that have US dollars reserved and held in bank accounts registered to Tether Limited. USDT is mostly used for trading against other digital currencies and for cross-border payments.
As a multi-chain stablecoin, USDT accounts for a large portion of the trading volume in the crypto market. It’s also the largest stablecoin and has a market capitalization of over $80 billion, according to Coinmarketcap.
USDT can be traded on popular crypto exchanges such as Binance. You can also get USDT by converting other cryptocurrencies, such as ETH, into USDT using the Trust Wallet Browser Extension or the mobile wallet.
USD Coin (USDC)
Like USDT, USD Coin also retains its value thanks to the 1:1 backing with the US dollar in its reserves. The coin was launched in 2018 through a collaboration between Circle and Coinbase. USDC offers people a high level of transparency and trust as it’s audited every month by a leading auditing firm.
You can use USDC on multiple blockchains, such as Algorand, Solana, Stellar, Tron, and Ethereum. In addition, people can use USDC to make cross-border payments, trade against other digital currencies, and earn investment income for people through lending protocols in the decentralized finance (DeFi) markets.
Binance USD (BUSD)
Launched in 2019 by Binance and Paxos, Binance USD (BUSD) is a digitized dollar that’s backed on a 1:1 ratio by the US dollar. Similar to USDC, BUSD also carries out monthly attestations and has become a popular digital currency in the global DeFi markets.
Dai (DAI) is a crypto-backed stablecoin and is the second-leading stablecoin by market capitalization. As an Ethereum-based ERC-20 token, DAI is managed and issued by MakerDAO, a decentralized autonomous organization that was launched in 2015 and enables the generation of DAI.
Unlike other stablecoins mentioned in this guide, DAI doesn’t have any US dollars in a reserve bank account. Instead, Dai incorporates smart contracts to manage the token supply. What this means is that for every DAI token that’s minted, there’s a DAI token that’s deposited into its smart contract vaults.
One of the main features that make DAI stand out is that its reserves aren’t managed by a private company. In addition, the burning of DAI and its issuance are transparent as they are recorded on the Ethereum blockchain.
Now that we have a better understanding of what privacy coins and stablecoins are, let’s look at their differences.
Privacy Coins vs. Stablecoins: The Basic Differences
Although both privacy coins and stablecoins are both cryptocurrencies, they were each designed to serve different purposes.
Privacy coins were created to give people an alternative means of carrying out their transactions privately and anonymously. With privacy coins, no information is shared about the participating parties ensuring that transactions can’t be traced back to them.
Stablecoins, on the other hand, were designed to provide you with a more stable form of digital money that isn’t as volatile as traditional cryptocurrencies. Stablecoins are used as trading capital, as a base currency for crypto trading pairs on exchanges, as a remittance rail, and for payments. In countries with weakening local currencies, dollar-backed stablecoins are also used as a store of value, in addition to bitcoin.
Besides the use cases, both privacy coins and stablecoins were designed for different kinds of people. Privacy coins, for instance, are used by people who want to carry out transactions without revealing any information about who they are, whom they are transacting with, and what amount they are transacting.
Conversely, stabelcoins give people an alternative digital currency that they can use as a medium of exchange, be it for cross-border payments, as trading capital, or as a transactional currency.
Despite their differences, both beginners and experienced crypto investors can benefit from privacy coins and stablecoins. For instance, a crypto trader can use stablecoins as their trading capital to move in and out of other cryptocurrencies. Moreover, individuals and businesses can use stablecoins to make dollar payments without requiring a US dollar bank account.
Despite the fact that cryptocurrencies have been around for over a decade, it’s still a developing industry that changes rapidly. New types of crypto assets, such as NFTs or BRC-20 tokens, emerge ever so often, which can leave newcomers in the space quite confused.
If you are just starting out in crypto, it’s important to do your research, understand what already exists in the market, and how you can benefit from owning and transacting in different types of cryptocurrencies.
To learn more about what’s available in the fast-growing global crypto markets, check out the Trust Wallet blog and our online community. There, you will find educational material on all the most important topics, from wallet security to all the latest types of tokens making waves in the crypto markets
Once you feel comfortable owning and using stablecoins, privacy coins, or any other type of cryptocurrency, download Trust Wallet on your smartphone or as a browser extension on your computer to start exploring the brave new world of crypto.