A stablecoin is a type of cryptocurrency designed to have a stable value, minimizing the volatility commonly associated with cryptocurrencies like Bitcoin or Ethereum. The idea behind stablecoins is to maintain a value pegged to a stable asset or a basket of assets, such as fiat currencies (like the US Dollar), commodities, or other cryptocurrencies.
A stablecoin is a type of cryptocurrency designed to minimize the huge price swings associated with most regular cryptocurrencies. They aim to achieve this by pegging their value to a stable asset or basket of assets like:
These pegging mechanisms aim to keep the stablecoin's price stable and predictable, making it more suitable for everyday transactions and financial applications compared to highly volatile cryptocurrencies like Bitcoin. It is also beneficial for holding as a store of value as seen in countries like Argentina where the local currency loses value so many people hold their money in stablecoins such as USDT.
There are different ways stablecoins achieve stability:
Stablecoins offer a range of benefits, including:
Depending on the use case, for example, accessing Decentralized Finance applications, some stablecoins may be more appropriate than others.
Fiat-collateralized stablecoins provide a straightforward peg but rely on trust in the custodian holding the fiat reserves.
Crypto-collateralized stablecoins are decentralized but may be exposed to volatility in the underlying collateral.
Algorithmic stablecoins aim to be fully decentralized but may face challenges in maintaining stability in certain market conditions.
Outside of this, the major risks of using stablecoins are:
Centralization: Fiat-collateralized stablecoins often rely on a central custodian or issuer to hold and manage the reserves. This introduces counterparty risk, as users are dependent on the custodian's ability to maintain the peg and the security of the underlying assets.
Depegging: While designed for stability, even stablecoins can fluctuate slightly in price. Under extreme market conditions or internal issues, they could temporarily or permanently lose their peg to the underlying asset. This can lead to financial losses for holders who try to redeem their coins at the intended price.
Regulation & availability: Governments are still developing regulations for stablecoins, creating uncertainty about their future legal status and potential restrictions. This uncertainty can impact the overall adoption and usability of stablecoins.
Technological risks: Stablecoins that rely on smart contracts are vulnerable to bugs, vulnerabilities, or exploits in the code. A flaw in the smart contract could lead to the loss of funds or disrupt the stability mechanism.
Liquidity: In times of high demand or market stress, stablecoins may face liquidity issues. Users may find it challenging to redeem or trade stablecoins at the desired pegged value if there is insufficient liquidity in the market.
From the latest 2024 Coinmarketcap data on market capitalization, the top 10 stablecoins are:
Source: CoinMarketCap
As you can see from the numbers, the top two stablecoins, USDT and USDC are the giants in the space, with their combined market cap taking up the vast majority (80%+) of the stablecoin industry. USDT is far out ahead of its biggest competitor USDC. Both are controversial, with USDC being seen as too centralized.
At the time of writing, many of these stablecoins have depegged from a 1:1 dollar value with TrueUSD worth 98.7 cents and the infamous TerraClassicUSD worth 2.7 cents, having never regained its peg after the market-wrecking crash of Terra’s LUNA.
Of course, there are many more stablecoins than those in this list, with some backed by non-USD assets, but in terms of the top coins used by crypto traders today, the above is the definitive ranking.
