Stablecoin Is the Foundation of the Modern Cryptocurrency Market - Comprehensive Guide

Why Are Stablecoins Important in the Crypto Ecosystem?

The cryptocurrency market always faces a fundamental challenge: volatility. When Bitcoin rises 20% and then drops 15% within a few days, traders and companies find it difficult to use it for daily transactions. That is precisely why stablecoins were created.

Stablecoins are digital assets designed to maintain a stable value by pegging them to an external reference point—usually USD, EUR, or tangible assets like gold. Unlike Bitcoin or Ethereum, whose prices fluctuate, stablecoins promise predictability and stability, providing a solid foundation for complex DeFi applications.

As of August 2023, the stablecoin market has grown into a diverse ecosystem with over 140 different stablecoins, each serving specific needs of investors, traders, and financial institutions.

How Stablecoins Work: Three Main Approaches

Method One: Fiat-Collateralized Support

This is the most common and straightforward model. Each stablecoin is issued with a reserve of traditional currency (USD, EUR), or equivalent financial instruments (treasury bonds). The ratio is usually 1:1—one stablecoin token is backed by one unit of the corresponding fiat currency.

The advantage is transparency and simplicity. The downside is reliance on intermediary organizations to manage reserves, which can raise concerns about decentralization.

Method Two: Cryptocurrency Collateral Support

Instead of using fiat, this type of stablecoin is collateralized with other cryptocurrencies like Ethereum or Bitcoin. However, because cryptocurrencies are volatile, over-collateralization (over-collateralized) is necessary to ensure safety.

For example, to generate $100 worth of DAI stablecoin, you might need to provide $150 worth of Ethereum as collateral, creating a buffer layer.

Method Three: Algorithmic Support

Algorithmic stablecoins do not rely on physical reserves. Instead, they use mathematical formulas to automatically adjust supply and demand, keeping the price aligned with the target. When prices spike, the system creates more tokens; when prices fall, it absorbs tokens from circulation.

This approach is the most innovative but also the riskiest. The collapse of UST in 2022 serves as a warning example.

Leading Stablecoins: Who Is Leading the Market?

Tether (USDT) - The Pioneer

Tether launched in 2014 and became the first stablecoin on the market. Today, it remains the king of stablecoins.

With a market cap of over $83 billion as of August 2023, USDT holds more than 68% of the stablecoin market share. It operates on dozens of blockchains including Ethereum, TRON, Solana, Avalanche, and many others, offering broad usability.

USDT’s competitive advantage is its superior liquidity. Almost all major crypto exchanges support USDT, making it a natural bridge between markets.

USD Coin (USDC) - The Strong Contender

USDC is managed by the Centre Consortium, founded by Circle and Coinbase. It ranks sixth among all cryptocurrencies by market capitalization, with a value exceeding $26 billion and accounting for over 21% of the stablecoin market share.

Each USDC is backed by a dollar reserve consisting of cash and short-term Treasury bonds held by Circle. The backing from regulated financial institutions explains why many consider USDC a “safer” choice compared to USDT.

USDC also operates across multiple blockchains: Ethereum, Avalanche, TRON, Stellar, Solana, Algorand, Flow, and Hedera.

DAI (DAI) - Decentralized Stablecoin

DAI is created by MakerDAO, a decentralized autonomous organization (DAO). The major difference is that DAI is not issued by a centralized company but by a network of users and smart contracts.

Supported mainly by Ethereum, DAI maintains its stable value through automatic adjustment mechanisms. As of August 2023, DAI is the third-largest stablecoin with a market cap of over $5.3 billion.

The benefit of DAI is that it does not require trust in a centralized entity. The drawback is that the creation process is more complex and can be exposed to risks from the volatility of collateral assets.

( USDD - TRON’s Initiative

USDD is an algorithmic stablecoin introduced by TRON on its own blockchain. Designed to compete with major stablecoins, USDD uses the Peg Stability Module )PSM### to enable 1:1 exchanges with other stablecoins, enhancing stability.

As of August 2023, USDD ranks seventh among stablecoins with a market cap of over $723 million.

( Frax )FRAX### - Hybrid Algorithm Innovation

FRAX launched in 2020 and represents a hybrid approach. Instead of being 100% collateralized or 100% algorithmic, FRAX uses a variable ratio of both methods.

Within the Frax Finance ecosystem, two tokens operate together: Frax ($FRAX), a USD-pegged stablecoin, and Frax Shares ($FXS), a governance token. This mechanism allows high flexibility while maintaining stability.

FRAX is the sixth-largest stablecoin with a market cap of over $810 million as of August 2023.

Commodity-Backed Stablecoins: Investing in Physical Assets

A growing list of stablecoins backed by tangible assets such as gold, silver, and oil.

( Tether Gold )XAUT###

XAUT bridges the world of cryptocurrencies and physical commodities. Each XAUT token represents ownership of one troy ounce of pure gold stored in the London Good Delivery (LGD) vault.

This provides investors an easier way to own gold without worrying about physical security or transportation.

( Pax Gold )PAXG###

Similar to XAUT, PAXG is an ERC-20 token representing ownership of gold stored in LBMA-approved vaults in London, managed by Paxos Trust.

A unique advantage of PAXG is the ability to exchange it for physical gold bars or USD at current market prices, offering greater flexibility.

Emerging Stablecoins Making Waves

( PayPal USD )PYUSD###

PayPal, a giant in financial services, has introduced its own USD-pegged stablecoin. This indicates increasing acceptance of stablecoins by traditional financial institutions.

( First Digital USD )FDUSD###

Launched in June 2023, FDUSD is a relatively new player but has grown rapidly. Issued by First Digital Group (based in Hong Kong), it operates on Ethereum and BNB Chain.

A notable feature is that FDUSD can be directly exchanged for real USD, unlike some stablecoins that are only pegged in value.

By early September 2023, FDUSD became the ninth-largest stablecoin with a market cap below $400 million. This growth was driven by a major exchange’s decision to cease support for BUSD, encouraging users to switch to FDUSD.

( Euro Coin )EUROC###

Circle introduced EUROC in May 2023. This is a fully Euro-backed stablecoin with a 1:1 conversion rate to EUR.

Since August 2023, EUROC has been available on Ethereum and Avalanche.

( Djed of Cardano

Djed is the stablecoin of the Cardano blockchain, with a market cap of over $3.5 million as of August 2023.

Practical Benefits of Stablecoins

) Price Stability Is the Fundamental Advantage

The main strength of stablecoins is their ability to preserve value while remaining digital assets. This makes them better tools than Bitcoin and Ethereum for daily payments and short-term value storage.

Risk Mitigation in Volatile Markets

When Bitcoin drops 30% in a week, many traders sell all their assets for stablecoins to avoid further losses. This action is called “hedging” ###hedging###.

Stablecoin trading volume on-chain spikes during bear markets, demonstrating that investors rely on them to protect their portfolios.

( Gateway to DeFi

Stablecoins are the backbone of decentralized finance. They are used as collateral in lending protocols, traded on DEXs, and lent out on yield platforms.

Without stablecoins, participating in DeFi would be much more complicated.

) Global, Borderless Connectivity

Stablecoins transcend geographical boundaries. Someone in Argentina can quickly send money to Vietnam via stablecoin, bypassing slow international transfer systems.

This is especially valuable for countries experiencing hyperinflation, where local currency rapidly loses value.

Passive Income Generation

By lending stablecoins on DeFi platforms or exchanges, you can earn interest. This is a way to generate income streams from idle assets.

Hidden Risks You Need to Know

Not all stablecoins are created equal. The market has seen notable failures:

UST and Luna - In 2022, the algorithmic stablecoin UST collapsed completely, causing billions of dollars in losses. This shows that algorithms are not always effective, especially during panic.

Uncollateralized Stablecoins - If a stablecoin is issued without reserves or with non-transparent reserves, it can collapse at any moment.

Centralization Risks - USDT is issued by a company, Tether Limited. If Tether faces legal or financial issues, the entire USDT ecosystem could be affected.

Regulations and the Future of Stablecoins

Regulators worldwide are focusing on stablecoins. Singapore completed a regulatory framework in August 2023, requiring issuers to maintain full reserves.

The general trend is toward transparency, full reserve backing, and independent audits. This may limit some types of stablecoins but will increase investor confidence.

Frequently Asked Questions

How many stablecoins are there? As of August 2023, CoinMarketCap lists over 140 stablecoins. The list continues to grow as more projects launch their own versions.

Which stablecoin is the best? There is no single answer. USDT is the most popular due to liquidity. USDC is considered “safer” thanks to backing from major institutions. DAI is preferred by those who favor decentralization.

Where can I store stablecoins? You can store them on hot wallets ###hot wallet### on exchanges or in cold wallets (cold wallet) like hardware wallets (Ledger) for maximum security.

Can stablecoins collapse? Yes. Especially algorithmic stablecoins or those lacking full reserves are at high risk. UST is a warning example.

Can I earn profits from stablecoins? You cannot profit from price changes (since they are stable), but you can earn interest by lending them on DeFi or trading platforms.