If you’ve been at all plugged into the vast world of cryptocurrency lately, you’ve probably heard of stablecoins. True to their name, stablecoins are intended to provide the stability ordinarily found in traditional assets within the otherwise volatile crypto market because of their supposed 1-to-1 match to the U.S. dollar.
Just like the U.S. dollar used to be backed by gold, stablecoins are meant to be “pegged” to the dollar to help give it more stability than some other digital assets like Bitcoin or Etherum. Although they currently only make up about $160 billion of the $1.2 trillion cryptocurrency market, stablecoins have surged in popularity in recent years for people who want to participate in the larger decentralized finance system.
There are many different stablecoin currencies, and they are all pegged to the dollar in different ways. Some issuers claim to have dollars or other physical assets like gold that are equal to the total volume of stablecoins issued, others use an algorithmic method to automatically encourage the buying and selling of coins to regulate their value relative to the dollar.
Top Stablecoins to Know
- DeFi Dollar
- Pax Gold
- Gemini Dollar
- USD Coin
But it’s important to remember that even stablecoins can be volatile. TerraUSD, one of the largest stablecoins on the market right now, recently broke from its 1-to-1 dollar match — at one point crashing as low as 30 cents. And Tether, another popular stablecoin, is reportedly showing signs of fragility.
As of now, there is still no way to guarantee there are enough (or any) assets to back up a given stablecoin. And, by and large, cryptocurrencies in the United States have gone unregulated. That began to change, however, when President Joe Biden signed a $1.2 trillion bipartisan infrastructure bill, which included some new legislation that would affect the crypto sector. More recently, the White House announced Biden will sign an executive order outlining the first ever, “whole-of-government” approach to regulating cryptocurrency, directing multiple government agencies to answer specific questions about the risks and potential benefits of these digital assets and the technology that supports them.
Stablecoins will likely be among the first in this space to get regulated thanks to the Stablecoin Transparency of Reserves and Uniform Safe Transactions Act of 2022, or Stablecoin TRUST Act for short — a bill drafted by Sen. Pat Toomey of Pennsylvania that promises sweeping and comprehensive regulations of all stablecoin issuers. If the bill is passed, it will make the United States the first Western country to fully regulate and accept stablecoins as an official part of the financial banking system.
Important Stablecoin Terms to Know
In the event that does happen, it’s important to get acquainted with the U.S. financial system’s newest member. The whole space can be a little intimidating at first, so here are some definitions to help you get started:
- Stablecoin: True to their name, stablecoins are intended to provide the stability ordinarily found in traditional assets within the otherwise volatile crypto market because of their supposed 1-to-1 match to the U.S. dollar.
- Fiat currency: This is government-issued currency that is not backed by physical commodities like gold or silver. Rather, their value is derived from the government that issued it, and it varies according to supply and demand, as well as the stability of the government at hand.
- Staking: The process by which crypto transactions are verified. When you put your coins at stake, you have the chance to earn rewards. The more coins you stake, the more you can potentially earn.
- Protocol: These are a basic set of rules that allow data to be shared between two or more computers. In the world of crypto, they establish the structure of a given blockchain — the distributed database that allows digital assets to be exchanged over the internet.
- DAOs: Short for decentralized autonomous organization, DAOs are community-led, autonomous online entities. Smart contracts lay their foundational rules, and then they are able to execute on agreed-upon decisions at any point through proposals, voting and audits. DAOs come in many shapes and sizes, but protocol DAOs use stablecoins as a voting metric.
Again, there are many different stablecoin currencies, and they are all pegged to the U.S. dollar in different ways. But most can be organized into three different buckets, depending on the mechanism used to stabilize their value:
- Algorithmic stablecoins: These use algorithms and smart contracts to manage the supply of the tokens issued. The system will reduce the token supply if the price falls below whatever fiat currency it tracks through methods like burning or buybacks. If the price surpasses the value of the fiat currency, new tokens will be put into circulation to reduce the stablecoin’s value.
- Crypto-backed stablecoins: These use other cryptocurrencies as collateral, and smart contracts to monitor the minting and burning of the coin. This is intended to make the process more reliable, since users can independently audit the contracts. Some of these crypto-backed stablecoins are also run by DAOs, where the community can vote on changes.
- Fiat-backed stablecoins: These use government-issued currency like the U.S. dollar as collateral. Users can convert from fiat into a stablecoin and vice versa at whatever the pegged rate is. And if the price of the coin falls below the underlying fiat, investors can use arbitration methods to bring the price back to a fixed rate — simultaneously purchasing and selling the same asset on different markets.
When you’re ready, all you have to do is go to one of the many crypto exchanges or crypto wallets out there, make a deposit through either a normal debit card or crypto debit card, and exchange that money for the stablecoin of your choice.
As with any other investment, be sure to only find platforms that are secure, and be sure to manage your finances responsibly. While stablecoins may be less volatile than other forms of crypto, they still use newer technology that can be susceptible to bugs or other vulnerabilities, and there’s always the risk of error or loss — so be sure to only handle funds that you can afford to lose.
Stablecoins to Know
Often considered to be one of the leading stablecoins, Binance is issued through a partnership between its namesake, cryptocurrency infrastructure provider Binance, and crypto asset exchange Paxos (more on them later). It was launched in 2017 and managed to reach a market capitalization of $90 billion in 2021 — a massive leap from the less than $7 billion it was worth just a year earlier. As a company, Binance offers various other services in the digital asset space as well, including crypto wallets, savings accounts and even NFTs (non-fungible tokens).
Like many other stablecoins, Celo Dollars are pegged to the U.S. dollar. They are also native to the Celo blockchain’s reserve system, which is a group of smart contracts that use a portfolio of cryptocurrencies to expand and contract the supply of Celo Dollars. This influences its value on the crypto market as well.
Dai runs on the Ethereum blockchain, and algorithmically attempts to keep itself tied to the U.S. dollar. Unlike centralized stablecoins, Dai isn’t backed by U.S. currency in a bank account. Rather, it is backed by collateral in the MakerDAO platform, a decentralized autonomous organization that also exists on the Ethereum network — allowing people to lend and borrow using cryptocurrencies. So, if the Dai credit system gets upgraded or shutdown, holders may need to convert their Dai to Ethereum cryptocurrency through the Maker platform.
Also referred to as DUSD, DefiDollar is a stablecoin index backed by Curve LP tokens. As a company, DefiDollar Finance also offers interest-bearing Bitcoin through a collaboration with Badger Finance’s decentralized autonomous organization, as well as option-based synthetic assets, which give users exposure to a variety of digital assets without needing to hold the underlying asset.
As its name indicates, EURS is a digital token developed by STASIS that is pegged to the Euro. While it is still quite small compared to its U.S. counterparts, EUROS is the world’s largest Euro-backed stablecoin on the market right now. And because its reserves are in accounts of partner institutions, STASIS claims its coin has an “unrivaled level of reserve transparency.”
Fei USD has 1-to-1 redeemability with the U.S. dollar through its use of PCV, or protocol controlled value, which is a model used by numerous other stablecoin projects. Unlike the TVL, or total value locked model, which essentially gives users an IOU for their deposits that can be withdrawn whenever they like, PCV means the protocol at hand retains the user-deposited funds permanently. That way, the protocol can focus on maintaining that $1 peg.
Frax claims to be the world’s first “fractional-algorithmic” stablecoin, meaning it is partially backed by collateral and partially stabilized algorithmically. In addition to Frax, which is pegged to the U.S. dollar, the company has FPI, which is pegged to the U.S. Consumer Price Index. Frax is currently implemented on Ethereum and 12 other chains and aims to provide “highly scalable, decentralized, algorithmic money” in place of fixed-supply digital assets like Bitcoin.
HUSD is built on the Ethereum, HECO, Tron and Cube networks. To date, more than $10 billion worth of HUSD has been minted, and another $10 billion has been redeemed, according to the company.
Otherwise known as LUSD, this stablecoin was created by Liquity, a decentralized borrowing protocol that allows you to draw 0 percent interest loans against Ether as collateral. The loans are paid out in LUSD, which is pegged to U.S. dollars, and must maintain a minimum collateral ratio of only 110 percent. The loans are also secured by a stability pool, which contains LUSD, and by fellow borrowers collectively acting as guarantors.
This is an algorithmic stablecoin pegged to the U.S. dollar and collateralized by the WAVES token. Issuance, staking and reward payouts of Neutrino USD are fully transparent and governed by a smart contract. The Neutrino protocol also has an extension called decentralized forex, or DeFo, which facilitates instant swaps of other stable-price assets tied to popular national currencies, indices or commodities.
Built by Origin Protocol, Origin Dollar claims to be the first stablecoin that can earn a yield while it’s still in a user’s wallet. Because yields are generated automatically through open-source, on-chain yield farming strategies while remaining in the user’s custody, they can earn passively while maintaining control.
Formerly known as Paxos Standard, Pax Dollar is considered to be the world’s leading regulated stablecoin. It is regulated by the New York State Department of Financial Services, and its reserves are held in cash and cash equivalents, which means customer funds are reportedly safe and available for redemption at all times. Paxos, the company behind Pax Dollar, raised more than $400 million in venture funding last year alone, and was last valued at more than $2 billion.
Not to be confused with Paxos’ U.S. dollar-backed stablecoin listed above, Pax Gold is a digital currency that is backed by genuine, physical gold. Gold-backed cryptocurrency is a fairly new class of stablecoin, but it is one that stands to outperform the wider market, which has recently taken a plunge amid record inflation and war. At just over two years old, Pax Gold is one of the largest gold-backed stablecoins on the market today, and has managed to slowly make gains as the larger crypto market continues to take a tumble.
SpiceUSD is soft pegged to the U.S. dollar, meaning it is not meant to go up or down in price. Its creator, Spice Trade protocol, designed the stablecoin to automatically adjust and protect against inflation. The goal is to provide a digital currency that maintains the relative purchasing power of the U.S. dollar, while meeting the rising demand for a decentralized, scalable, modular, cross-chain and efficient system of trade.
Stably is a fintech company that aims to help traditional businesses enter the world of crypto, providing technology infrastructure for asset tokenization. Stably USD is the company’s inaugural token in a series of stablecoins developed by Stably. It is backed by the U.S. dollar, and collateral is held in FDIC-insured trust accounts managed through Stably’s platform.
TerraUSD is a decentralized and algorithmic stablecoin that is built on the Terra blockchain. It was created to offer an alternative to the problems faced by other stablecoin leaders, promising higher scalability, interest rate accuracy and interchain usage. Instead of using technical support, the creation of TerraUSD is facilitated by burning its sister cryptocurrency Luna. Because of this, it is able to meet the requirements of DeFi protocols without losing scalability, and it can be easily added to crypto wallets by adding TerraUSD as a payment method. The company has come under quite a bit of scrutiny in recent months after its value dropped to nearly zero — a result of an ongoing crypto market slump that caused Luna’s value to drop considerably. But co-founder Do Kwon has since announced a recovery plan to keep this from happening again in the future.
Tether’s namesake currency is one of the oldest stablecoins on the market, and has been described as the “lifeblood of the crypto ecosystem.” It is also considered to be one of the top stablecoins right now by market capitalization. Meanwhile, amid rising concern over its long-term stability, the company claims it is working to become the most transparent stablecoin.
Reportedly the first regulated stablecoin backed by the U.S. dollar, TrueUSD is among the most famous of all the stablecoins out there right now. Users can invest in it to not only earn, but also hedge against the volatility of any crypto assets they own. They can also trade TrueUSD on dozens of exchanges, markets and over-the-counter desks around the world, as well as stake, farm and mine TrueUSD on other DeFi platforms like Ethereum, TRON or BSC.
USD Coin, or USDC, is another popular stablecoin that is pegged to the U.S. dollar. It was launched in 2018 through a consortium called Centre that was created by fintech giants Circle and Coinbase. Since then, Coinbase has gone public, and so has Circle thanks to a $4.5 billion merger with special purpose acquisition corporation Concord Acquisition last year, which happened just weeks after it raised a massive $440 million funding round.
Reserve Rights is a dual-token stablecoin platform comprising both the asset-backed Reserve Stablecoin and an RSR token that helps keep the price of the stablecoin stable through a system of arbitrage opportunities, which are simultaneous purchases and sales of the same asset in different markets. Its maker, the Reserve protocol, claims its goal is to help build a decentralized, inflation-resistant world in which its tokens aren’t pegged to any one fiat currency.