Stablecoins are cryptocurrencies that are pegged to another currency or asset class. Usually, this ‘peg’ is a fiat currency such as USD or EUR, but it can also be a commodity such as gold. Being pegged to an asset means the stablecoin’s value is meant to track the value of its peg. This, in theory, makes stablecoins a less volatile form of cryptocurrency. There have been instances, however, of stablecoins losing their pegs so the stability of their price isn't guaranteed.
Stablecoins provide a bridge between traditional fiat currencies and cryptocurrencies. They serve a growing variety of purposes, are a fundamental part of modern-day crypto trading, and come in many forms. So, it’s wise to understand this form of crypto, whatever your interest in the space.
In this article, we’ll introduce what stablecoins are, explore the leading stablecoins today, and suggest why stablecoins are growing in popularity.
What are fiat-backed stablecoins?
Simply put, fiat-backed stablecoins are a virtual representation of fiat (real-world) currencies that are minted on a blockchain. To create fiat-backed stablecoins, fiat currencies are locked and an equivalent is minted through smart contracts. The locked fiat serves as the currency backing the stablecoin, which determines the value of the stablecoin. This is known as a peg. For dollar-backed stablecoins like USDC and USDT, this peg is 1:1 to the US dollar, meaning that for every such stablecoin minted, $1 of USD is held in reserve in the form of US dollars or other asset equivalents.
Unlike the real-world currencies backing them, stablecoins provide a practical alternative for borderless, permissionless transfer of money around the world. Among other factors, this has led to a sharp rise in the popularity and usage of stablecoins.
Which stablecoins lead the way today?
Leading the rise in stablecoins are USD Coin (USDC) and Tether (USDT), which boast a superior market cap to competing fiat-backed coins. However, like much of crypto, things change quickly. In November 2023, Binance announced it was ending support for the exchange’s native stablecoin, Binance USD (BUSD). At the time of the announcement, BUSD was the fifth largest stablecoin by market cap.
Meanwhile, other stablecoins are grabbing market share as the space evolves. If you’re considering which stablecoin is best for your needs, it’s important to understand what these coins are and how they function.
Read on for an overview of seven of the top stablecoins in 2024.
USDT is a dollar-backed stablecoin. It came into existence when it was first issued by Tether Limited in 2014 ‘to bridge the gap between crypto and fiat’. Tether was the first digital asset to give users access to a blockchain-based, platform-agnostic US dollar that had the technical advantages of fiat currencies and highly liquid cryptocurrencies, without their volatility.
USDT is also a stablecoin pegged to the US dollar 1:1. To maintain this peg, Tether holds assets worth more than $86.3 billion against liabilities of $83.2 billion, according to a September 2023 consolidated reserves report.
By tapping into the best of both fiat and crypto, Tether Limited created a permissionless way to transact using crypto-dollars with anyone globally. What’s more, the speed, transparency, and low cost of stablecoin transactions have opened up the use cases of the crypto ecosystem to payments, remittances, and more.
USDC is a dollar-backed stablecoin created by the peer-to-peer payments technology company Circle in 2018. Like every other dollar-backed stablecoin, its price stays fixed at $1. It’s managed by a consortium called Centre, which was founded by Circle and includes Bitcoin mining company Bitmain and crypto exchange Coinbase. Centre is responsible for overseeing the financial and technical standards for USDC and maintaining the 1:1 peg to the dollar.
USDC is a highly liquid stablecoin that's available on most centralized and decentralized exchanges (DEX). It can be exchanged via wallets that are ERC-20 compatible.
True USD (USDC) is a relative newcomer to the stablecoin space, having been launched in 2018 by its issuers TrustToken and PrimeTrust. TUSD was created to address some of the pressing challenges related to stablecoins, namely trust and transparency. To achieve this, all USD user funds are handled by third-party escrow accounts which the issuing entities can't directly access. This helps to prevent the misuse of funds, reducing risk for holders of TUSD.
Like other stablecoins, TUSD aims to maintain a 1:1 USD peg. TUSD has differentiated itself from other stablecoins as the first USD-pegged stablecoin to apply real-time attestations for its underlying reserves from independent third-party institutions.
BUSD is the native stablecoin issued by Binance and blockchain company Paxos Trust. Like its competitors, BUSD aims to remain pegged 1:1 to the US dollar. There's no cap on the supply of BUSD, as supply is determined by the quantity of USD people want to purchase BUSD with. Paxos Trust is responsible for issuing the token. This includes burning BUSD when users choose to redeem their tokens for USD, and minting USD when users want to create BUSD using the fiat currency.
BUSD is built on the Ethereum blockchain and also supports the Binance Chain’s BEP-2 standard.
DAI stands apart among other leading stablecoins as the only iteration to be decentralized. Where the likes of USDT and FDUSD are controlled by an intermediary, DAI is issued through an Ethereum-based decentralized application (DApp) named the Maker Protocol.
Launched in 2019 by Decentralized Autonomous Organization (DAO) named MakerDAO, DAI claims to be fully decentralized and backed only by crypto collateral. The token is meant to have a soft peg to the US dollar at a 1:1 ratio.
How does DAI work? New tokens are created by the Maker Protocol DApp, which requires users to lock in Bitcoin or Ethereum-based assets as security. These assets are held within smart contracts on the Ethereum network, referred to as Maker Vaults, which are operated under the governance of the Maker Protocol.
6. Lybra's eUSD and peUSD
Lybra Finance is a decentralized platform that provides users with access to Liquid Staking Tokens (LST). In short, LSTs are tokens issued following proof-of-stake, when users deposit native cryptocurrency in a protocol.
eUSD and peUSD are interest-bearing stablecoins created by Lybra Finance that use LSTs as collateral. Holders of each stablecoin can gain attractive yield — a unique feature among stablecoins. As such, eUSD and peUSD — the latter being a DeFi utility version of eUSD — aim to provide both a stable store of value and a new route to earning yield.
7. Synthetic USD
Synthetic USD arrived to meet demand for those who want exposure to the stability of the US dollar but without requiring a traditional banking relationship. The basic premise behind synthetic USD is that a stable USD price can be achieved by holding two inversely related assets. For example, a user would open a hedge of 100 USD worth of Bitcoin through a derivatives exchange. If the price of Bitcoin rose, the value of the hedge would fall by the same amount, and vice versa. As a result, the net position should remain the same.
Galoy, a company that builds Bitcoin-native banking infrastructure, counts Stablesats as a feature on its platform. The feature allows users to access stable USD price exposure via Bitcoin.
Why stablecoins are growing in popularity
As crypto in general moves closer towards mainstream adoption, stablecoins will likely continue to play a pivotal role. There are multiple reasons why the coin class is growing in popularity.
Stablecoins and decentralized finance (DeFi)
Decentralized finance (DeFi) is one area where stablecoins are growing in importance.
DeFi is an emerging system of financial services built on blockchain technology. It allows users to access a range of products and services without the need for a trusted third-party. This model offers greater transparency and access than traditional banking systems, as well as potential cost savings due to reduced fees.
Stablecoins are a key component in this system, especially when it comes to settling transactions without the need for intermediaries. Unlike volatile cryptocurrencies such as Bitcoin or Ethereum, the value of stablecoins is meant to remain relatively constant. This is why stablecoins are often used as collateral in many decentralized lending and borrowing platforms, for instance. It has happened in the past that stablecoins lose their peg, however, sometime without recovery.
The appeal of dollarization
Thanks to their peg — which is often the US dollar — stablecoins provide a unique opportunity to gain exposure to the US dollar, particularly for people in emerging markets. Holding USD-pegged stablecoins is closely equivalent to holding dollars. This can be particularly beneficial in countries where local currencies are volatile or depreciating.
For example, if a country's currency is prone to rapid inflation, holding stablecoins can provide a haven of stability. The coins allow individuals to maintain the value of their assets and even make gains when their local currency depreciates.
Meanwhile, stablecoins can enable those in emerging markets to participate in the global economy more easily. Traditional banking systems may pose barriers for people in these regions due to high transaction fees or lack of accessibility. With stablecoins and the blockchain technology that underpins them, people can transact globally with minimal fees, expanding their economic opportunities.
Ultimately, stablecoins can be a practical tool for dollarizing a portfolio, which some traders view as a way of providing a measure of financial stability in uncertain economic conditions.
For further reading into stablecoins and their future direction, check out this insight piece from OKX Ventures.
The risks involved in stablecoins
While stablecoins offer many benefits, it's important to acknowledge potential risks associated with them.
First, the stability of stablecoins hinges on the reliability of the backing asset and the robustness of the issuing organization. If the asset backing the coin experiences a dramatic drop in value, or if the issuing organization encounters financial or legal difficulties, the stablecoin's value could plummet and 'depeg'.
Second, regulatory uncertainty poses a risk. As the crypto market is relatively new and rapidly evolving, regulatory bodies around the world are still formulating their positions and policies, which could impact the stability and utility of stablecoins.
Lastly, while transaction times are generally quick, potential network congestion could delay transactions, which might be problematic for users needing immediate access to funds.
Mitigating risk is a necessity. To help, Bluechip is a stablecoin rating agency that provides economic safety ratings for stablecoins on the market today. The tool grades each stablecoin as a measure of their robustness. You can also see the peg, type of backing, market cap, and price of each coin.
How to access stablecoins
The fastest and simplest way to access stablecoins is to purchase them through a centralized exchange. Here, you can typically use fiat currency to purchase your preferred token. Alternatively, you can swap other forms of crypto, such as Bitcoin or Ethereum, for a stablecoin.
Given their popularity, stablecoins can also be purchased through a decentralized exchange (DEX) via a peer-to-peer marketplace. Many consider DEXs to be a more secure way to trade, being non-custodial, meaning users remain in control of their private keys when making transactions.
The final word
Many would agree that stablecoins are a crucial part of the past and future of crypto and its evolution. They provide a link between fiat currency and cryptocurrencies through a peg to established assets. For many, this construction alleviates some of the risk associated with conventional cryptocurrencies as in theory, the major swings in volatility seen among BTC, ETH, and the like are reduced.
Stablecoins are growing in popularity and finding new use cases, as shown by the emergence of decentralized tokens such as DAI. Further evolution is possible, and as crypto nudges closer towards the mainstream, stablecoins could grow in influence. It’s relatively straightforward to buy and hold stablecoins today, and as with any form of cryptocurrency, it’s essential to do your own research before committing funds and making a trade.
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