Cryptocurrencies such as Bitcoin and Ethereum can be highly volatile. As the world of cryptocurrency continues to evolve, stablecoins are designed to maintain a stable value, Stablecoins are backed by real-world assets and provide a hedge against market volatility.
Stablecoins are a type of cryptocurrency that is designed to maintain stable value, usually pegged to a fiat currency like the U.S. dollar. Unlike other cryptocurrencies, which can be highly volatile Stablecoins provide more stable value. Stablecoins can be used for various purposes such as making payments, storing value, or serving as a medium of exchange for decentralized applications (dApps) on blockchain networks.
Types of Stablecoins
- Fiat-Backed Stablecoins
Fiat-backed stablecoins are the cryptocurrencies most closely related to fiat currencies because they are backed by real-world currencies. Each fiat-backed stablecoin is tied to a specific fiat currency in a one-to-one ratio. The most common fiat currency to use is the U.S. dollar.
Examples of fiat-backed stablecoins include Tether (USDT) and USD Coin (USDC).
- Commodity-Backed Stablecoins
Commodities-backed stablecoins are cryptocurrencies that use commodities such as gold, real estate or metals as collateral to provide their stability. Gold is the most popular commodity used as collateral for commodity-backed stablecoins.
Examples of commodity-backed stablecoins include Paxos Gold (PAXG) or Tether Gold (xAUT).
- Crypto-Backed Stablecoins
Crypto-backed stablecoins are cryptocurrencies that use one or more cryptocurrencies as collateral to provide their stability.
Dai stablecoin is an example of crypto-backed stablecoins.
- Algorithmic Stablecoins
Algorithmic stablecoins are the stablecoins that use algorithms to control their supply and achieve stability in the marketplace.
Top 10 Stablecoins for Hedging Against Market Volatility
Tether USDt (USDT) is the most idly adopted stablecoin, having pioneered the concept in the digital token space. Tether tokens are the assets that move across the blockchain just as easily as other digital currencies but they are pegged to real-world currencies on a one-to-one basis.
Tether tokens are referred to as stablecoins because they offer price stability as they are pegged to a fiat currency. All tether tokens are pegged to one-to-one with a matching fiat currency (e.g. 1 USDT = 1 USD) and are backed 100% by Tether’s reserve.
- USD Coin
USD Coin (USDC) is a popular stablecoin that is pegged to the U.S. dollar. USDC is always redeemable 1:1 for US dollars. USD Coin is managed by Centre, a consortium co-founded by the cryptocurrency exchange Coinbase,and Circle, a financial technology company. Centre aims to change the global financial landscape by connecting every person, merchant, financial service and currency worldwide. Owing USDC during periods of market volatility can help to stabilize a portfolio’s value.
Dai (DAI) runs on the Ethereum blockchain and is tied to U.S. dollars. Unlike centralized stablecoins, Dai isn’t backed by the 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. If the Dai credit system gets upgraded or shut down, holders may need to convert their Dai to Ethereum cryptocurrency through the Maker platform.
- Binance USD
Binance USD (BUSD) is a 1:1 USD-backed stablecoin. BUSD was launched on 5 Sep 2019 and aims to meld the stability of the dollar with blockchain technology. Binance USD is issued by Binance and Paxos, a regulated financial institution that holds the corresponding U.S. dollars in reserve. BUSD can be used for a wide range of purposes including trading, investing and paying for goods and services. It can be easily traded on a variety of platforms, including Binance and can be used to purchase a wide range of cryptocurrencies.
TrueUSD (TUSD) is the first USD-pegged stablecoin to deploy real-time attestations for its underlying reserves by independent third-party institutions. TUSD offers convenience and utility in various financial contexts such as trading and transfers. Currently, TUSD can be obtained on over 100 cryptocurrency exchanges and DeFi protocols, providing users with flexibility and accessibility. TUSD offers enhanced liquidity, providing users with various financial opportunities for seamless transactions and efficient market participation. Additionally, TUSD does not charge any fees for its minting and redemption.
Frax (FRAX), a coin pegged to the U.S. dollar, operates on a fractional-algorithmic mechanism for its stablecoin, meaning it is partially backed by collateral and partially stabilized algorithmically. Frax aims to provide highly scalable, decentralized, algorithmic money in place of fixed-supply digital assets like Bitcoin. In addition to Frax, the company has FPI, which is pegged to the U.S. Consumer Price Index and frxETH, which is pegged to Ether (ETH).
- PAX Dollar
Pax Dollar (USDP) tokens are issued as ERC-20 tokens on the Ethereum blockchain and are collateralized 1:1 through the USD held in Pexos-owned US bank account. USDP 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 safe and available for redemption at all times.
- PAX Gold
PAX Gold (PAXG) is a stablecoin backed by physical gold. PAXG offers investors a cost-effective way to own investment-grade physical gold with all the benefits of the blockchain. Each PAXG token is backed by one fine troy ounce of gold, stored in LBMA vaults in London. If you own PAXG, you own the underlying physical gold held in custody by Paxos Trust Company.
- Liquity USD
Liquity USD (LUSD) is a USD-pegged ERC-20 token compliant with the Ethereum network. It 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 and must maintain a minimum collateral ratio of only 110 percent. The loans are also secured by a stability pool, which contains LUSD.
- Stasis EURO
Stasis EURO (EURS) is a stablecoin developed by Stasis that is pegged to the Euro. Like other fiat-backed stablecoins, EURS combines the best of blockchain technology with the legitimacy, trustworthiness and stability of the Euro. Stasis issues EURS, the most transparent stablecoin originating and operating in Europe. Fairly backed by 1:1 by cash and euro bonds EURS has 4 verification streams.
In the ever-evolving crypto world, stablecoins have emerged as a beacon of stability. Unlike volatile cryptocurrencies, stablecoins are pegged to traditional assets like the US dollar, ensuring minimum price fluctuations. Stablecoins are paving the way towards a new era. These digital currencies are open, global and accessible to anyone on the internet, 24/7. Plus they offer speed and cost-effectiveness, making them an alternative to traditional fiat currencies.
Frequently Asked Questions (FAQs)
Why stablecoins are popular?
Stablecoins are popular because they help to reduce some of the market volatility associated with cryptocurrencies.
Which stablecoin is safe?
USDC is widely considered to be the safest stablecoin.
Why stablecoins are the future?
Stablecoins are the future because they provide a more secure store of value and a more efficient medium of exchange for digital currencies.
Is it safe to hold stablecoins?
Stablecoins are generally considered safer than other cryptocurrencies due to their value being pegged to a stable asset such as the US dollar.
How do stablecoins work?
Stablecoins are described as IOU since you use your money to buy stablecoins and then redeem them later for your original currency.