Stablecoins

Stablecoins are digital assets that solve the problem of cryptocurrency volatility. Such currencies retain the mobility of cryptocurrencies in the digital space, but at the same time, they are backed by real sources like fiat currencies, precious metals, or other cryptocurrencies, as well as algorithmic functions. In this article, we compile a stablecoin list and explore different types of currencies backed by various assets to determine the best stablecoin.

Fiat-backed stablecoins

USDC, USDT, GUSD, BUSD, TUSD, USDP.

Such stablecoins are pegged to fiat currency in proportion to the number of tokens in circulation. A stablecoin central issuer holds fiat in reserve.

Example. The USDT stablecoin is issued by Tether on different blockchains like Ethereum, Tron and Solana. Each USDT token is backed by US dollars that are held in one of the company’s bank accounts.

US dollar peg. It is provided by two factors: the presence of exchanges that convert stablecoins to real dollars and arbitrageurs who keep the market price within $1 if it is rejected.

Risks. These stablecoins are centralized. Moreover, all control is in the hands of a single company, which can freeze the currency at any time.

Crypto-backed stablecoins

DAI, VAI, USDP.

When you purchase a stablecoin of this type, you lock your other cryptocurrency as a pledge in a smart contract in exchange for tokens of equal value.

Example. The DAI stablecoin may only be issued by providing the system with a pledge in the form of a specific currency (for example, Ethereum or wBitcoin). To get 100 DAI, you must deposit at least $145 in ether. In other words, the minimum pledge is 145%. If the value of the pledge falls below a certain level, the system automatically liquidates your position to back up the issued DAI.

US dollar peg. If the price of a cryptocurrency rises, the protocol changes the minimum pledge parameter, making the creation of new stablecoins cheaper. In the event of a price decrease, users have the option to withdraw their deposit from the protocol at a reduced price and burn the stablecoins.

Risks. The sufficiently large collateral in cryptocurrency allows these stablecoins to withstand the volatility of the cryptocurrency. However, sharp pumps and dumps in the cryptocurrency exchange rate can lead to a significant deviation in the price of a stablecoin from $1.

Commodity-backed stablecoins

PAXG, XAUT.

Commodity-backed stablecoins function similarly to the first type, except that they are backed by physical assets such as precious metals, oil and real estate.

Example. The XAUT stablecoin is gold-backed. Its owners can redeem XAUT tokens for actual gold if they pass the TG Commodities Limited identification procedure and have at least 430 XAUT in their account.

US dollar peg. Since it is backed by physical reserves of raw materials, this type of stablecoin is always traded at the same price. Users have a variety of options for exchanging a stablecoin for this raw material, for example, a gold bar.

Risks. It is important to remember that the price of gold and other raw materials fluctuates, and as a result, the rate of stablecoin may also change.

Algorithmic stablecoins

UST, FEI, FRAX, AMPL, BAS.

These stablecoins are the result of the deployment of specialized algorithms and smart contracts that regulate the number of tokens in circulation.

Example. The most notable example is the digital currency UST on the Terra blockchain. New USTs are issued by burning LUNA tokens. As a result, UST is not backed by a coin pledge.

US dollar peg. The protocol modifies the number of stablecoins on the market, allowing the issuance of other tokens valued at $1 per stablecoin. Arbitrageurs generate tokens by burning stablecoins and sell them on the exchange. This guarantees that the stablecoin’s price remains stable.

Risks. Market confidence is critical for algorithmic stablecoins. People should be willing to buy and hold a token that is issued through the burning of a stablecoin. Any undermining of trust in the asset can lead to a collapse, as happened with the LUNA token.