What Are Stablecoins? Stablecoin Types Explained

What Are Stablecoins? Stablecoin Types Explained
TabTrader Team
TabTrader Team
Reading time is 9 min
Reading time is May 18, 2022

What are stablecoins

In this article we give the definition of stablecoins, explain their working mechanism and touch on their various types.

What is a Stablecoin?

A stablecoin is a type of digital asset designed to maintain a consistent market price. Stablecoins combine the best features of traditional and decentralized finance by offering volatility-free valuations along with instant processing and a high level of security.

Stablecoins are widely implemented in cryptocurrency trading as they provide a reliable store of value and can help mitigate risk when dealing with volatile assets. By using stablecoins to move in and out of volatile cryptocurrencies traders are able to lock profits and avoid losses. On crypto exchanges that do not support fiat currency due to regulations, stablecoins are the only way to keep the value of funds at a stable level.

As opposed to fiat currencies stablecoins offer fast and cheap transactions and allow for the quick transfer of assets between exchanges. Stablecoins are also frequently used for arbitraging, cross-border payments and lending.

Stablecoins Explained

  • Stablecoins attain stable value through the use of algorithmic mechanisms that control the coin’s market supply or by pegging to assets with relatively low volatility.
  • Pegged stablecoin issuers hold fiat currency, precious metals or digital value as collateral to prove that the cryptocurrency is worth the amount claimed. If holders do not have confidence in the pegged coin’s value they are likely to collectively exit the position, crashing the asset’s price.
  • Some of the fiat-backed stablecoins go through regular audits to verify they own sufficient collateral for all the coins in circulation. Crypto-collateralized stablecoins in most cases have their issuer’s balance displayed on the blockchain.
  • Since the collateralized stablecoins’s peg is most commonly maintained by a single entity, this type of digital currency is largely considered to be centrally controlled

Types of Stablecoin

<b>Fiat-collateralized stablecoins</b> <b>Non-collateralized (algorithmic) stablecoins</b> <b>Crypto-collateralized stablecoins</b>
Fiat-collateralized stablecoins are backed by a government-issued currency such as the US dollar or the euro. For every coin entering circulation the issuer replenishes the reserve by one unit of fiat as collateral. By pegging a stablecoin to a traditional currency the issuer guarantees that its price will not fluctuate dramatically as long as the country’s economy stays intact. Non-collateralized (algorithmic) stablecoins achieve price stability through manipulation of the coin market supply. They do not hold any assets as collateral and use a system of balancing supply and demand to keep their value at a stable level. When faced with a deflationary tendency the algorithm adds coins into circulation to lower the price of the stablecoin. Reduction of the coin market supply serves to handle the stablecoin’s decrease in purchasing power. The algorithm responsible for minting and burning is stored in the stablecoin’s smart contract. Crypto-collateralized stablecoins have other cryptocurrencies in reserve. Taking into account that due to a relatively small market cap even bigger cryptocurrencies like Bitcoin or Ether are prone to volatility, crypto-collateralized stablecoins hold higher amounts of collateral to effectively maintain a consistent market price. By over-collateralizing a stablecoin an issuer creates a cushion against price fluctuations in the collateral asset.

Stablecoin Regulation

Among all the existing types of crypto assets, stablecoins are of the greatest concern to governments around the world as they are frequently pegged against a national currency. Regulation of stablecoins has the potential to not only protect crypto investors from possible risks but also improve the traditional financial system.

In November 2020 the European Commission published a proposal on regulation of “Markets in Crypto Assets” (MICA). According to the document, issuers of all types of cryptocurrency are obliged to publish a whitepaper and are not allowed to use misleading advertising. It is also proposed that the companies issuing “e-money” — stablecoins backed by a single fiat cryptocurrency, and “asset-referenced” tokens — stablecoins collateralized by a mix of fiat currencies, one or several commodities/ crypto-assets or a combination of such assets, be required to obtain a banking license in an EU member state.

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Although the US has not yet proposed a clear set of regulations regarding cryptocurrency, Gary Gensler, chairman of the US Securities and Exchange Commission (SEC) considers the recognition of stablecoins as securities the most suitable option for their integration into the traditional financial system. In the US there are also proposals to treat stablecoins as money-market mutual funds, regulate them as banks or designate stablecoins as a risk to the current financial system.

Top Stablecoin List

USDT (United States Dollar Tether) is a stablecoin created by a Hong Kong based company called Tether Limited. Originally built on top of the Bitcoin blockchain it was later also deployed on the Ethereum, EOS, Tron, Algorand and OMG blockchains. A fiat-collateralized stablecoin pegged to the US Dollar, USDT is currently the largest stablecoin in the entire cryptocurrency scene with a market capitalization of $81.34 billion. USDT was initially founded in 2014 as Realcoin.

USDC (United States Dollar Coin) is a fiat-collateralized stablecoin issued by Circle — a peer-to-peer payments technology company based in Boston, Massachusetts and Coinbase — an American company that operates several cryptocurrency exchange platforms. Released in September 2018, USDC has a market cap of more than $51 billion as of March 2022 and is the second-largest stablecoin by market cap. As with USDT, USDC is pegged to the US dollar. USDC reserves are regularly attested by Grant Thornton, LLP — the sixth largest US accounting and advisory organization. USDC is an ERC-20 standard token deployed on the Ethereum blockchain.

BUSD (Binance United States Dollar) is a USD-backed stablecoin launched on September 5, 2019 by Binance — the world’s largest cryptocurrency exchange. BUSD is deployed as a BEP-20 standard token on Binance Smart Chain and as an ERC-20 token on the Ethereum blockchain. With a $17 billion market capitalization BUSD is currently the third largest stablecoin in the industry. The BUSD Monthly Audit Report is available on its official website.

DAI is a crypto-collateralized stablecoin created by MakerDAO — a decentralized autonomous organization on the Ethereum blockchain. DAI is soft-pegged to the US dollar and collateralized by a mix of cryptocurrencies including but not limited to ETH, Basic Attention Token (BAT), USDC, Wrapped Bitcoin (wBTC) and Compound (COMP). Launched on December 18, 2017, DAI has a current market cap of around $9 billion.

TUSD (TrueUSD) is a USD-pegged stablecoin launched by TrustToken — a fintech company maintaining a platform for creation of asset-based tokens. TUSD claims to be the first regulated stablecoin fully backed by the US dollar. TrueUSD is deployed on the Ethereum, TRON, BSC, BS, Polygon, Avalanche, Fantom, HECO, Arbitrum and Cronos blockchains and has a current market cap of close to $1.3 billion.

How do I Buy Stablecoins?

The most common way to buy any crypto asset including stablecoins is through use of decentralized or centralized cryptocurrency exchanges. Upon creating an account and possibly going through identity verification procedures a user will be able to deposit funds and start buying cryptocurrency. Some well-known cryptocurrency exchanges offering stablecoins are Coinbase, Binance and Kraken. Stablecoins can be bought for fiat currency as well as for other cryptocurrencies such as Bitcoin and Ether.

Stablecoin FAQs

Are stablecoins a good investment?

At present stablecoins are most commonly used as a trading tool or as a way to avoid commission when making payments in fiat. Even though stablecoins are designed to maintain a stable price and are not likely to dramatically increase in value, their lending and staking opportunities have the potential to provide passive income.

List of stablecoins 2022

Some of the popular stablecoins in 2022 are: Tether (USDT), USDC, Dai (DAI), Binance USD (BUSD), TrueUSD (TUSD), Digital Gold Token (DGX), Pax Dollar (PAX), Neutrino USD (USDN) and Tribe (TRIBE).

Is Bitcoin a stablecoin?

Bitcoin is not a stablecoin. Bitcoin’s price fluctuates in response to multiple factors including market supply and demand.

Are stablecoins real money?

Stablecoins are a type of digital currency and can serve as a medium of exchange and a store of value. As with fiat currencies stablecoins maintain a relatively stable value and can be used to make online payments. While not often accepted in stores at present, stablecoins are easy to exchange for fiat currency.

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