Overview of Stablecoins: What You Need to Know

In the journey of exploring the world of cryptocurrencies, a question always arises: how to minimize risks from extreme price volatility? The answer is stablecoin – a type of digital asset designed to maintain a stable value. Unlike Bitcoin or Ethereum, which are highly volatile, stablecoins create a safe bridge between cryptocurrencies and traditional fiat currencies, opening up opportunities for daily transactions and decentralized finance (DeFi) applications.

What is a stablecoin? Basic operating mechanism

Stablecoin is a type of cryptocurrency developed with a clear goal: to maintain a constant value. To achieve this, they peg their value to external reference assets such as the US dollar, EUR, or even commodities like gold.

There are two main methods for stablecoins to stay stable:

Method 1 – Collateralized assets: A certain amount of fiat currency or other assets are stored as collateral, ensuring a 1:1 ratio with the issued stablecoin.

Method 2 – Algorithmic: Using mathematical formulas to automatically adjust supply and demand, automatically minting or burning coins to keep the price stable.

Different types of stablecoins on the market

The stablecoin market today is diverse, with over 140 types listed. Each has different mechanisms to achieve price stability.

Stablecoins backed by fiat currency

This is the most common type, backed 1:1 by cash or treasury bills. Notable examples include:

USDT (Tether) – The largest stablecoin by market capitalization (over $83 billion USD as of August 2023), accounting for over 68% of the stablecoin market share. USDT operates on multiple blockchains such as Ethereum, TRON, Solana, Avalanche, making it an optimal liquidity choice for transactions.

USDC – The second most popular stablecoin managed by an international consortium. Each USDC is backed 1:1 by USD reserves or treasury bonds. With a market cap of over $26 billion USD and a 21% market share, USDC is recognized by regulators for its high transparency.

Stablecoins backed by cryptocurrencies

This type is collateralized by other cryptocurrencies, but requires over-collateralization to withstand volatility.

DAI – Created by MakerDAO, a decentralized autonomous organization. DAI operates on Ethereum via smart contracts and is integrated into over 400 DeFi applications. With a market cap of over $5.3 billion USD, DAI is the third-largest stablecoin on the market.

USDD – A new algorithmic stablecoin issued on the TRON blockchain. USDD uses mathematical mechanisms to maintain its peg to USD and currently has a market cap of over $723 million USD.

FRAX – A “hybrid algorithm stablecoin” developed by Frax Finance. FRAX combines partial collateralization and algorithmic mechanisms, allowing it to be more flexible than traditional stablecoins. Its market capitalization exceeds $810 million USD.

Stablecoins backed by commodities

These stablecoins peg their value to tangible assets such as gold, silver, or oil.

Tether Gold (XAUT) – Each XAUT token represents ownership of one troy ounce of stored gold. This allows investors to access physical commodities through blockchain technology.

Pax Gold (PAXG) – Similar to XAUT, but managed by Paxos Trust. PAXG offers a way to own physical gold with free storage costs and can be exchanged for recognized gold bars or USD.

Recent stablecoins and developments

PayPal USD (PYUSD) – The launch of a stablecoin from a major financial company like PayPal indicates increasing acceptance of this asset class.

First Digital USD (FDUSD) – Launched in June 2023, FDUSD is issued on Ethereum and BNB Chain. Notably, FDUSD can be exchanged for real USD, increasing credibility. After a major exchange announced halting support for an older stablecoin, FDUSD quickly became the ninth-largest stablecoin with a market cap close to $400 million USD.

Euro Coin (EUROC) – Announced in May 2023, this is the first fully Euro-backed stablecoin, allowing 1:1 exchange for EUR. EUROC is currently available on Ethereum and Avalanche.

Djed (Cardano) – A stablecoin developed on the Cardano blockchain, with a market cap of over $3.5 million USD.

Why are stablecoins important? Key benefits

Price stability

The clearest benefit of stablecoins is price stability. This makes them more suitable than Bitcoin or Ethereum for daily transactions, payments, and real-world financial activities.

Risk mitigation tool

When the crypto market crashes, many traders use stablecoins to hedge against volatility. If Bitcoin and altcoins decline, they can quickly convert to stablecoins to protect their assets. This explains the significant increase in on-chain stablecoin volume during market downturns.

Foundation for decentralized finance

Stablecoins play a crucial role in the DeFi ecosystem. They are widely used as collateral in lending protocols, liquidity mining platforms, and other decentralized financial services.

Global access and financial inclusion

Stablecoins transcend borders, enabling borderless transactions and providing financial services to those without access to traditional banking systems. This is especially important in countries experiencing inflation or hyperinflation.

Passive income generation

Through DeFi platforms and crypto exchanges, you can lend stablecoins to earn interest. This is a way to generate passive income from your digital assets.

Frequently Asked Questions about Stablecoins

Which stablecoin is the best?
There is no absolute “best.” The choice depends on your needs:

• For high liquidity: choose USDT
• For regulatory trust: choose USDC
• For decentralized solutions: choose DAI
• For algorithmic stability: choose USDD or FRAX

Can stablecoins collapse?
Yes, there are risks if they are not properly backed or managed. The collapse of UST in 2022 is a notable example, although major stablecoins like USDT and USDC are considered safer.

Are stablecoins regulated?
Regulators worldwide are paying attention to stablecoins. Some jurisdictions like Singapore have established frameworks requiring issuers to maintain full and transparent reserves.

Can I store stablecoins on hardware wallets?
Yes, you can store stablecoins on hardware wallets like Ledger for optimal security.

Conclusion

Stablecoins have become an essential component of the cryptocurrency ecosystem. They address the price volatility issue that has hindered widespread adoption of cryptocurrencies for real-world applications. By pegging their value to reference assets and employing innovative mechanisms, stablecoins provide a reliable means of transaction.

The current stablecoin landscape is highly diverse – from longstanding players like USDT to newer entrants like PYUSD or EUROC. Each offers different advantages depending on user needs.

As cryptocurrencies continue to grow worldwide, stablecoins are expected to play an increasingly important role in shaping a stable, accessible, and inclusive financial economy for everyone.