What Are the Main Stablecoins?

As cryptocurrencies became increasingly popular over the years, their use and adoption still face some entry barriers, especially due to the high volatility of assets. Volatility is what keeps institutional players (like banks, investments funds and other organizations) away from the crypto market, as they claim that the high fluctuations of the market inhibit its mass adoption. A way to get around this situation was through the creation of stablecoins.

These coins are most often pegged to fiat currencies, usually the dollar (USD) and there are dozens of them available in the market. It is important for an investor to know the main stablecoins and understand how they work.

What Are Stablecoins?

We can define that stablecoins are a response to the call of cryptocurrency investors who are looking for a cryptocurrency equivalent to fiat currencies, for example, the dollar.

Stablecoins are cryptocurrencies with their value pegged to a specific asset: it can be gold, or other commodities, but it is usually a fiat currency as USD. Their main goal is to maintain a reliable value over time without volatility and be a way of transferring value easily.

A quick example of their use: suppose a Bitcoin investor wants to quickly convert their profits made from Bitcoin trades to a currency similar to the dollar (stable and easy to take profit), and after that invest elsewhere or just withdraw the profits to his bank account. Stablecoins were born especially to address this type of issue.

What Are Stablecoins Used for?

Besides the solution mentioned above, stablecoins are also used by investors who want to protect their money from sudden fluctuations in values related to other cryptocurrencies. As a result, stablecoins can serve as a tokenized version of fiat currencies or even others that have an already established value.

There are decentralized financial platforms that use stablecoins to provide cryptocurrency lending to their customers, such as Nexo and Abra. One of the main reasons they make use of stablecoins is that the value of the guaranteed tokens is unlikely to change dramatically between the time a customer is approved for a loan and the cryptocurrency arrives in their digital wallet.

What Are the Main Stablecoins?

Tether (USDT)

Launched in 2014, Tether was initially launched as RealCoin. Their product was initially limited to claimed dollar reserves only, with Tether said to be worth one US dollar. Tether also offers other stablecoins: EURT, CNHT, XAUT and MXNT.

Tether is currently one of the biggest stablecoins in the market. As years went by, the company ended up pressed by the market to compile its regulatory reserves reports to prove that its peg to the dollar could be maintained. Reports show that only about 10% of their reserves is left in the form of deposit or cash, while almost half of it is composed of t-bonds and commercial papers, which refer to short-term debts issued by companies in order to raise funds. The company’s goal is to reduce its commercial paper holdings to zero, in order to ensure the quality of their assets, given the meltdown similar companies suffered around May, 2022.
Investors can always check Tether’s transparency regarding their reserves. The values are published daily and updated at least once per day on their website.

USD Coin (USDC)

This stablecoin was founded by the partnership between an exchange and a mining company in September 2018. USDC is considered to be one of the safest and most reliable stablecoins, and its supply is limited to dollar reserves only.
USD Coin’s reserves are monthly audited by Grant Thornton LLP, and can be accessed on USDC’s transparency page.

Binance USD (BUSD)

Launched in 2019 as a partnership between the exchange and Paxos, BUSD has limited offers for dollar reserves. BUSD’s reserves are monthly audited by Withum to ensure that the supply of the stablecoin is consistent with the USD in reserve accounts and the reports can be verified in Paxos’ attestation page.

Dai (DAI)

Dai is a stablecoin powered by MakerDAO, an Ethereum-based protocol. The Dai Token was launched in 2017 and its supply is limited to the collateral stored in their vaults. It is important to mention that DAI’s collateral is backed by other cryptocurrencies, not US dollars, and this multi-collateral option summed up to the transparency via smart contracts has proven to be working so far. Also, users can vote for more collateral options in the MakerDao community.
Although this token can be used for trading, its use is more prevalent in DeFi protocol services, and since its launch, Dai has added a number of financial services. Also, any user can mint DAI tokens and deposit their Ether tokens as collateral.

TrueUSD (TUSD)

With a limited release, TrueUSD has regular audit claims and was the first regulated stablecoin fully backed by US Dollar. Their audits point out that the offer is limited to the dollars they have. Its daily turnover is considered somewhat low, and TUSD enables DeFi and staking to earn returns from holdings.
TUSD’s reserves can be verified in real time through Armanino’s TrustExplorer.

Gate USD (USDG)

USDG (Gate USD) is a USD pegged stablecoin managed by Gate.io and generated by overcollateralized pledging multiple blockchain assets. USDG is part of Gate.io’s ecosystem, stored as a crosschain asset in multiple chains, such as Gatechain and Ethereum.

The TerraUSD (UST): Why did it collapse?

TerraUSD (UST) was launched in September 2020, and brought to the market a disruptive way to maintain its indexation of one UST per dollar. The supply on this stablecoin changed algorithmically, based on the value and supply of the Earth-native LUNA token, so that the system automatically caused a balance that maintained its price: it is a “mint/burn” mechanism to adjust the balance without further deviations from the 1:1 peg.

In May 2022, due to the high market volatility and a bear market trend in general, the balancing mechanism failed: the demand for UST fell considerably and there was a huge sell pressure on Luna token:

• $150M UST were withdrawn from the Curve Wormhole pool by Terraform labs to prepare for the 4pool launch;

• $350M UST were sold for USDC on Curve by a supposed ‘attacker’. This led to a significant imbalance between the two assets in the pool: UST, 85% and 3CRV, 15%.

• After the first signals of de-pegging (falling below $1 at a considerable rate), there was a bank run on Anchor: users rapidly swapped what they had of UST.

Conclusion

Stablecoins are now a fundamental part of the cryptocurrency economy, which seeks to provide a safe and reliable medium of exchange for investors and traders. Policymakers are increasingly attentive to the ups and downs of cryptocurrencies, which is an excellent sign for the crypto sector, given that stablecoins are a necessary component for strengthening the cryptocurrency economy, especially when the market is in a downtrend.
Still, stablecoins have a lot to evolve, especially to ensure that there will always be reserves that can maintain the peg, which will bring trust in the market and attract institutional players to it. Investors should also be aware of what is the mechanism behind each stablecoin before choosing which ones they will rely on.