This article breaks down what stablecoins are, the use cases, the different types, the risks involved, and a list of top stablecoins with ranking.
Stablecoins Meaning
A stablecoin is a digital asset that maintains a stable value relative to other currencies. These digital assets are designed to provide a low-volatility financial foundation for blockchain applications and other decentralized digital systems.
Stablecoins are often seen as a financial “cheat code” as they give you exposure to the lucrative opportunities of cryptocurrencies. But without having to make any uneducated bets or participate in the traditional “risky” games of crypto.
These coins serve as the link between cryptocurrencies and fiat currencies. They’re referred to as “stable” simply because they don’t experience high volatility.
Stablecoins are tokens pegged to another currency, fiat, or financial instrument, and are often seen as the backbone of Decentralized Finance (DeFi). Stablecoins retain their value because they are backed by the value of their underlying assets, which can be anything from fiat currency to oil and gold, or sometimes even cryptocurrency.
For example, Tether (USDT) and USD Coin (USDC) are stablecoins backed by US dollars held in reserve. PAX Gold (PAXG), on the other hand, relies on a gold reserve to maintain a steady price.
A stablecoin is designed to maintain a pre-determined price regardless of changes in its underlying assets or market conditions.
Advantages of Stablecoins
1) Safe Bet Against Market Volatility
Everybody knows how wildly crypto prices can swing. But stablecoins lower the volatility in your portfolio and help you preserve your assets from losing too much value.
2) Higher Returns Than A Savings Account
Stablecoin lending is one of the most high-yield opportunities for retail investors, often offering double-digit interest rates. This demand is fueled by massive institutional demand for stablecoin loans.
Compared to savings accounts offered by banks, which usually pay out less than one percent a year, stablecoin returns on decentralized crypto lending platforms can be as high as 20% to 30%.
3) Hedge Against Ridiculous Inflation
Unless you’ve been living under a rock, you know the current inflation rate is at an all-time high as the “official” number has soared up close to 10%.
When you participate in stablecoin farming, you can easily “cancel out” the inflation rate without making any uneducated bets or playing the traditional “risky” games of crypto.
4) Quickly Capitalize On Wild Market Swings
With stablecoins, you don’t have to wait several days to transfer from your bank to your Central Exchange (CEX). This can be crucial whenever there are huge swings in the market, and you want to quickly capitalize and “buy the dip.”
How Stablecoins Work
In the 21st century, stablecoins are considered to be one of the major financial breakthroughs of the era. Here are some of the primary use cases:
- Safe Haven Asset: Unlike cryptocurrencies that fluctuate dramatically in price, those who use stablecoins to store value have minimal risk of loss. Stablecoins are great for traders or investors who need to “hold value” in a digital asset without the volatile price swings of cryptocurrency.
- Payments: Businesses can benefit from accepting stablecoins as payment, allowing them to reduce transaction fees that come with typical payment processors.
- Instant Settlements: When settlements are paid out, they often can’t be immediately delivered because they’re subject to regular banking hours. Stablecoins operate on blockchain, meaning they run 24/7: parties can receive settlement immediately.
- Escrow: Stablecoins automate the escrow process through smart contracts that evaluate escrow conditions without the use of institutional intermediation.
- Alternative Banking: 14.1 million American adults are unbanked. All you need is internet access to have a stablecoin “account,” opening financial access to all.
- International Transfers: Stablecoins offer a cheap, fast, and accessible means of transacting value across borders.
How To Earn Interest (Yield) with Stablecoins?
Most people make their money with regular cryptocurrency through trading, mining, or staking, lending, or yield farming. Because stablecoins are tied to an asset, making money with stablecoin works a little differently. Here are the ways to make money with stablecoins:
- Staking: Staking involves helping maintain the flow of the blockchain network on a particular asset. In return, you earn compensation from income from the network. Essentially, you’re locking in your stablecoins to receive rewards. Examples of stablecoins that offer staking rewards include Binance, Tether, and PAX Gold. (See this guide to Best Crypto Staking Yields.)
- Lending: You can lend your stablecoins out to borrowers to earn money, with rates of return ranging from 5 to 12 percent. You can lend your stablecoin on many major crypto lending platforms, such as BlockFi or Celsius. (See this guide to Top Crypto Lending Platforms.)
- Yield Farming: Yield farming allows investors to earn money by lending stablecoins through smart contracts, like earning interest on a traditional savings account. (See this guide to Best Yield Farming Rates.)
Types of Stablecoins With Examples
Just as the government backs fiat currency, so too are stablecoins backed by some other asset or authority. Here are the types of stablecoins, and how they’re backed.
Fiat-Backed Stablecoins
Fiat-backed stablecoins are associated with a particular fiat currency: US dollars, Euros, etc. Fiat-backed stablecoins offer better stability, especially compared to crypto-backed stablecoins. While cryptocurrencies come with wild price fluctuations, fiat-backed stablecoins come with minimal price fluctuations, as there’s a trusted currency behind them.
However, fiat-backed stablecoins are relatively new and come with a limited track record, so they’re not without risk.
Here are some examples of Top fiat-backed stablecoins:
- Tether (USDT)
Tether is one stablecoin that was claimed in the past to be entirely backed by fiat until the United States government found out that they weren’t.
However, this does not take away that it is the largest stablecoin by market cap, with over $70 billion, and the most popular one.
Tether has launched itself on the Ethereum scaling solution, Polygon, to cement itself as a top stablecoin in the crypto market.
- USD Coin (USDC)
The USD Coin is a stablecoin that has always been fully backed by the equivalent value of U.S. dollar-denominated assets.
The coin is the second-largest stablecoin and was formed as a partnership between Coinbase and Circle.
The coin is also an Ethereum token, which investors can store in an Ethereum-compatible wallet.
It was also designed to let dollars move globally from the crypto wallet of investors to other exchanges, businesses, and people.
- Binance USD (BUSD)
Binance USD is a USD-denominated stablecoin launched in 2019 in Partnership with Paxos and Binance.
Thanks to its stability with the U.S. dollars, BUSD empowers traders and crypto users with the ability to transact with other digital and blockchain-based assets while minimizing the risk of volatility.
Since its launch, BUSD has performed exceptionally well and established itself as a leader in the cryptocurrency space with a market cap of $10 billion.
The risks of fiat-backed stablecoins include centralization and counterparty risk.
Centralization risk is when the accounts of fiat-backed stablecoins can be embezzled, blocked, or accessed by unauthorized individuals. Stablecoins also face the same centralization problem that fiat currencies do as regards a central authority who could potentially print excess money, leading to hyperinflation.
Counterparty risk is when the platform where you hold your stablecoins go under or experiences a leak, a hack, or a classic “rug pull” where the platform founders abandon their project, and, in a nutshell, run away with all its users’ money.
Crypto-Backed Stablecoins
As the name suggests, these are stablecoins “backed” by other crypto assets. Because cryptocurrency prices can be volatile, crypto-backed stablecoins are overcollateralized (meaning they keep extra crypto in reserves, in case of a market crash).
For example, to borrow $5 of a crypto-backed stablecoin, you may need to “put in” (or lock up) $10 of another crypto asset as collateral. If the underlying crypto asset loses its value, you still have a built-in cushion of $5. In general, this volatility makes crypto-backed stablecoins less reliable than fiat-backed stablecoins.
Examples of Top crypto collateralized stablecoins are listed below.
- MakerDao (DAI)
MakerDao is a project behind the stablecoin DAI, a cryptocurrency that is soft pegged to the U.S. Dollars.
What makes it unique is each DAI is backed by Ether instead of a 3rd party claiming to have the required collateral.
The main criticism of this coin, however, is that it isn’t truly decentralized due to the amount of USDC it holds.
- Abracadabra (MIM)
MIM is also known as Magic Internet Money, and it is a USD-pegged stablecoin that utilizes interest-bearing tokens.
The interest-bearing tokens accumulate interest and constantly go up in price as users hold them. In addition, they describe a portion in a lending pool that increases in volume as borrowers repay interest.
The risks of crypto-backed stablecoins are smart contract risks and asset collateral depreciation. And since these kinds of require over-collateralization, they are generally not the most capital efficient.
Commodity-Backed Stablecoins
These stablecoins maintain their value through precious metals or other commodities such as real estate or oil. While these stablecoins are generally centralized, the centralization protects users from crypto volatility. Gold is the most popular commodity to be collateralized. Paxos Gold, Tether Gold, and Digix are three of the most liquid gold-backed stablecoins.
Commodity-backed stablecoins allow you to invest in assets that may otherwise be out of reach. For example, obtaining and storing a gold bar can be complex and expensive, so holding a “gold stablecoin” is an easier way to store value without having to buy the underlying commodity.
Algorithmic Stablecoins
Algorithmic-backed stablecoins rely on specialized algorithms and smart contracts to manage the supply of tokens in circulation. For example, if the price of an algorithmic stablecoin is set at $1, but the stablecoin price rises higher, the computer algorithm will automatically release more tokens into the supply to bring down the price.
Alternatively, an algorithmic stablecoin will reduce the number of tokens in circulation when the market price drops below the price of the fiat currency it tracks.
How Price-Stable Are Stablecoins?
When looking at the prices of stablecoins on digital asset data platforms, you will notice that stablecoins often do not remain “stable” at $1.00. For example, at the time of writing this article, Tether (USDT), USD Coin (USDC), and the Gemini Dollar (GUSD) were trading at $1.01, $1.01, and $1.02, respectively.
The reason is that the issuers of dollar-collateralized stablecoins need to manage the supply of their coins through issuing and burning/redeeming to ensure the value of their coins maintains roughly one-to-one with the US dollar.
However, there have also been stablecoins that have lost their peg entirely. For example, Steem Dollars (SBD), a cryptocurrency of the Steemit network, was designed to maintain its value at one dollar. However, the startup behind the Steemit network eventually stopped managing the coin’s money supply and let the digital currency float freely. This caused the coin’s value to surge to $15 during the 2017 rally before it came crashing down to as low as $0.51.
Another recent example is Terra Luna. The Terra Luna Classic token which was then known as Terra Luna had crashed from a price of over $100 per $LUNA to less than $1. The Terra Luna token had a large market cap and was considered a worthwhile investment by holders until sometime between the 11th and 12th of May 2022.
Related:
Should Terra CEO Go To Prison For Losing People Millions In UST & Luna Scam?
Not all stablecoins are really 100 percent price-stable. Moreover, due to their centralized nature and occasional lack of transparency, some stablecoins are actually riskier than they may seem, even if their values oscillate closely around the $1 mark. Do your research and never invest more than you are willing to lose.
List of Top Stablecoins
| Name | Description | Year Founded | Number of social followers | Stabilized Asset | Quality of Team | Stabilization Mechanism | Score |
|---|---|---|---|---|---|---|---|
| USD Coin | USDC is a full reserve dollar stablecoin issued by the CENTRE Consortium. | 2018 | 5,600 | U.S. Dollar | The CENTRE and CIRCLE team have founded and helped run numerous high-profile technology companies including Brightcove and Macromedia. | Collateralized: Each USDC token has a corresponding $1 U.S. invested in an owned account. Decentralization will be ensured by allowing numerous different projects to join a network of USDC issuers overseen by the CIRCLE project, each of which maintains its own cash reserves to stabilize the tokens it issues. While the oversight of CIRCLE can insure against value fluctuation, allowing third parties to independently issue the USDC does invite potential concerns of individual error or bad actors. | 4.5 |
| True USD | True USD is a one-to-one stable currency that pegs its value to $1 U.S. per token. | 2018 | 17,200 | U.S. Dollar | The young team behind this project boasts some of the most impressive technology names in the field, albeit with little financial experience | Escrow: Each True USD is backed by $1 U.S. held in an escrow account by third parties. Qualifying institutions can participate in the True USD system, eliminating the need for trust in a central project (albeit replacing that with the need for trust in third-party accounting). With only two minor deviations, the price has remained stable within $0.02. | 4.5 |
| Tether | Tether is one of the most well-known, valued, and reliable stablecoins on the market. | 2015 | 170,300 | U.S. Dollar | Bloomberg, among other outlets, has published very serious questions regarding the accounting practices of Tether. The company’s founders have a range of professional experience, ranging from fintech to retail. | Collateralized: Each Tether token has a corresponding $1 U.S. invested in an owned account. While serious questions have been raised as to the company’s accounting practices in this regard, the token’s price has remained stable within $0.05. | 4 |
| Stably USD | Stably is a cryptocurrency pegged to the U.S. dollar, with each token set to $1. | 2019 | 2,900 | U.S. Dollar | Stably has a team with experience in both technology and finance. While they have little background in blockchain, their c-level leadership has worked with impressive firms in this space. | Collateralized: Stably will hold $1 U.S. in reserves for each token distributed with quarterly audits. | 3.5 |
| PAX Standard | Paxos Standard Token is a payment platform complete with the PAX stablecoin backed 1:1 to the U.S. Dollar. | 2016 | 26,700 | U.S. Dollar | The team backing Paxos is a mixed-bag with a wealth of expertise from tech and finance backgrounds | PAX is backed 1:1 by a reserve of USD. | 5 |
| PAX Gold (PAXG) | PAXG is an Ethereum-based digital asset backed by gold. As per the website, each token is backed by one fine troy ounce (t oz) of a gold bar. In this case, if you own PAXG, you also own the gold that backs it. | 2019 | 26,700 | Gold | The team backing Paxos is a mixed-bag with a wealth of expertise from tech and finance backgrounds. | The team backing Paxos is a mixed-bag with a wealth of expertise from tech and finance backgrounds. | 4 |
| Huobi USD | Huobi is one the Asia’s largest cryptocurrency exchanges, and in partnership with Stable Universal, the firms issued the HUSD stablecoin token as a means to uncouple for pre-existing 3rd party stablecoins, as well as gain exposure in DeFi markets and platforms. | 2020 | 736,600 | U.S Dollar | Singapore-based exchange Huobi has relished a market-leading position for some years. | Collateralized: Every HUSD token is backed by U.S. dollars held in reserves by a regulated trust company. | 4 |
| GUSD | Created by Gemini cryptocurrency exchange, the Gemini USD stablecoin claims to be the first U.S. Dollar-backed stablecoin to receive approval from a U.S. regulator and aims to be the most transparent stablecoin on the market. | 2018 | 330,800 | U.S. Dollar | Gemini was founded by Tyler and Cameron Winklevoss, two Bitcoin billionaires with a rich background in business.This trickles down to the team who collectively possess high levels of experience. | Collateralized: GUSD is backed 1:1 by real dollars in reserve, with monthly audits. | 4.5 |
| Digix | Digix takes the idea of a blockchain gold standard literally, promising that each DGX token represents 1 gram of actual, solid gold in a vault in Singapore. The utility of this over purchasing gold outright or an options contract remains uncertain, but the mechanism is sound. | 2016 | 17,600 | Gold | Digix is run by a team with extensive experience in both finance and blockchain development at some of the world’s largest firms. | Asset-Backed: A Digix token is minted once the underlying Proof of Provenance protocol confirms that a corresponding ounce of gold is in the vault. The price has fluctuated within approximately 25 percent since inception. | 4 |
| Dai | Dai is a decentralized stable currency which is pegged to the U.S. Dollar at a 1-to-1 ratio. | 2017 | 190,500 | U.S. Dollar | MakerDao’s Founder has almost no experience, having graduated in 2014. It has made up for this lack by hiring other executive-level talent with a deep bench of relevant experience. | Collateral Against Ethereum: To create Dai tokens users have to purchase and stake an equal value (in U.S. Dollars) of Ethereum tokens. As the price of Dai rises, users will be incentivized to create more. As the price falls, users will be incentivized to sell their assets back to the pool. | 4.5 |
| Binance USD | Developed by Binance, one of the largest cryptocurrency exchanges in the world, BUSD is a fully-regulated stablecoin backed by U.S. dollars, issued via the Paxos Trust Company. | 2019 | 6,100,000 | U.S. Dollar | As the world’s leading cryptocurrency exchange, Binance in partnership with Paxos have a wealth of industry-leading expertise. | Collateralized: Each BUSD is backed 1:1 by a reserve of dollars held in the Paxos account. | 4 |
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