Stablecoins are cryptocurrencies that are designed to have a stable value, unlike other coins whose values can fluctuate wildly. They are pegged to fiat currencies such as USD. This means that the price of a stablecoin will not change significantly in response to market movements.
Stablecoins can be used as a store of value, a medium of exchange, or both. They provide a safer option than using your credit card to buy crypto and have the benefit of being more liquid than other cryptocurrencies.
Stablecoin projects have been around since 2013, but their popularity has grown significantly over the last couple of years or so due to increased interest in stablecoins from investors and developers alike.
Types of Stablecoins
Stablecoins can be divided into several types depending on what their collateral is. Each of them has advantages and disadvantages and certain peculiarities in functioning. Let’s take a closer look at the main types.
Fiat-Backed Stablecoins
As the name of this type implies, fiat-backed stablecoins are pegged to a certain fiat currency and backed by this currency’s reserves. This is the most popular kind of stablecoins. They are widely used by investors to hold their funds in order to save them from crypto volatility.
Crypto-Backed Stablecoins
Crypto-backed stablecoins are not pegged to anything in the real world, they exist only on the blockchain. Instead, they are supported by other crypto assets via electronic vaulting. Because the collateralized crypto is often highly volatile, stablecoins of this type are often overcollateralized, meaning that the value of the issued coins is less than the value of coins in reserve.
Algorithmic Stablecoins
Algorithmic stablecoins are not necessarily pegged to any other assets. The main idea of this type is to control the value of the coin by controlling the supply via an algorithm.
Hybrid Stablecoins
This is a type where some features of more than two other types are applied to one coin. Such stablecoins may have some advantages that they take from different models. However, at the same time, they may appear quite complicated for understanding.
Stablecoins on the Market
At the moment there are a lot of various stablecoins on the market. And the number of projects is growing. However, not all of them become successful. Here are several examples of the best stablecoins in the current market.
USDT
Tether (USDT) is one of the most popular stablecoins, because it is backed by the most stable and popular fiat currency, the US dollar. Its market cap is $79,431,130,361 and is still growing.
USDC
USD Coin is pegged to the US dollar. However, USDC is supported by a mix of cash and short-term US Treasury bonds. This stablecoin was issued by Coinbase and Circle and it is managed by Circle consortium.
USDT vs USDC
Although these two coins are both stablecoins and have a lot in common, they have their own features. For example, USDC is considered to be more transparent, and thus trustworthy, than USDT. Moreover, it seems that Tether has a lot of security issues. On the other hand, USDT’s market capitalization is $79,431,130,361, while USDC’s market cap is only $33,305,522,381. The main difference between these coins is in the reserve funds. USDT is backed only by the fiat US dollar, while USDC’s reserves include cash and US Treasury bonds.
BUSD
Binance USD is another rather popular stablecoin, which is also backed by the US dollar. It is created by Binance, one of the world's biggest exchange services, and Paxos. What is also important is that this stablecoin is approved by the NYDFS. At the moment BUSD market cap is $7,823,771,205.
What makes USDT and BUSD successful? First of all, their ability to stay stable, which is the key feature of this type of coins. This means that their reaction to the market changes does not let them lose their position. At the same time they manage to maintain their service at a price comfortable for users. And, most importantly, they bring value enough for people to continue using these coins.
Unfortunately, the whole concept of stablecoins is rather fragile. There are a lot of factors that can prevent its success from happening.
- Market situation. Stablecoins are very sensitive to changes in the market, especially when it comes to market manipulation.
- Regulations. Since stablecoins are often pegged to a fiat currency or even a real-life asset, any regulations that concern their collateral also affect the stablecoin.
- Collateral problems. As it was said before, anything that happens with the collateral has its effect on the stablecoin. One of the biggest issues that can occur is inflation, which has significant consequences for pegged assets.
- Demand. If users do not see a specific value brought to the market by a new project, chances are high that demand for such an asset will be quite low, which will lead to a failure.
- Attacks. This is a factor that can never be excluded when it comes to crypto. Even the best security is not good enough yet to protect users from all the attacks possible.
UST Crisis
Probably, the most notorious case in recent times is the UST fall, which happened in the spring of 2022. UST was an example of algorithmically linked stablecoins. Its collateral was LUNA and a special algorithm stabilizes the price of UST by mining or burning LUNA, thus maintaining a level where 1 UST equals $1. For unknown reasons at one point an amount of UST, which was about $2 billion, was unstaked from the Anchor Protocol and sold. This action made the price fall below $1 and consequently the UST holders started purchasing LUNA in order to save their funds. However, at the same time LUNA became a victim of a bad market climate and crashed. As a result, UST depegged from LUNA and the value of UST could not be redeemed. The situation was developing fast and the algorithm failed to take any actions to prevent the failure. At the moment, it is believed that all this happened following an attack, but there is no proof.
Conclusion
Undoubtedly, stablecoins have a lot of opportunities in the future. Nowadays, we are witnessing an exciting process of change in the traditional economy. While some were expecting cryptocurrency to blow up the economy, stablecoins actually added more abilities to the existing financial system. It seems now that one of the possible sequences of events is with the development of regulations, traditional banks may step into the realm of stablecoins. Probably, at some point stablecoins will come together with CBDC.
A more real future is that stablecoins will continue to provide certain stability in the crypto world. With the development of Web3 and metaverses, the number of users is also increasing and users require an instrument that would protect their funds from crypto volatility and fiat inflation. One of the important features of stablecoins is that they are easy to swap both ways. So they are perfect for playing the role of a protection layer.
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