In the crypto industry, a particular category of tokens with a “stable value” is not affected by price volatility: the stablecoins. Over time we learned that the value of stablecoins is not always stable, and many questions afflict novice investors now, such as
What does it mean to be ”stable”?
How many types exist, and what are their differences?
What are the significant risks behind stablecoins?
What are the key points to be taken into account when analysing a stablecoin?
An in-depth analysis will clarify all these doubts.
Definition, features and types of stablecoins
What does it mean to be” stable”?
“Stablecoins are cryptocurrencies the value of which is pegged, or tied, to that of another currency, commodity or financial instrument. Stablecoins aim to provide an alternative to the high volatility of the most popular cryptocurrencies.” Source: Investopedia
As the name says, stablecoins are special categories of tokens characterized by the non-volatility of their price. They are linked to the price of another asset (US dollar, euro or gold) through a mechanism called peg. Their diffusion is due to the need to take shelter from crypto volatility in bearish periods without necessarily going through EUR or USD, subject to long banking times.
The main difference compared to electronic currency is that stablecoins are ERC-20 tokens, which can also be exchanged on DEX.
Features of stablecoins
When studying or analysing a particular stablecoin, it is crucial to focus on five key points:
Transparency and regulation (when it comes to centralized ones)
But how do the stablecoins keep their value pegged to another asset without being volatile?
It depends on their type and intrinsic characteristics. There are several ways to "anchor" these cryptocurrencies at the price of another currency, depending on how they work.
So how many types of stablecoins are there?
Types of stablecoins
Stablecoins are divided into two categories:
And three micro categories:
Algorithmic or no-collateralized
Now let’s see together some examples of stablecoins.
An article about the advantages and disadvantages of stablecoins.
What are stablecoins examples?
TetherUSD (USDT) is the most capitalized stablecoin ever and the third in market cap. Its value is pegged to the dollar for 1:1. Tether converts cash into digital currency to anchor or "peg" the currency's value to the price of national currencies such as the US dollar.
The company behind USDT is Tether Ltd, which makes fractional reserves. Like banks, it holds a part of its liquidity in a bank account, and the remainder is invested, lent, etc. USDT is one of the most well-known stablecoins in circulation, but its excessive centrality and lack of transparency is also the one that most worry users.
USD Coin (USDC)
This stablecoin is managed by the consortium Centre, formed by the company Circle and the exchange Coinbase and is therefore centralized. Unlike the previous one, USDC uses transparency and compliance with American laws and is fully open-source. Moreover, it publishes monthly audits by independent law firms that verify the presence of the declared assets. Many CeFi platforms and CEXs appreciate it thanks to its security and transparency policies. A slight drawback compared to Tether is that it is less present on exchanges with other coins.
Pax Dollar (USDP)
USDP is the only stablecoins that do not make fractional reserves; it relies on liquidity present in current bank accounts. Its token is linked to the dollar price; its goal is to create crypto assets based on traditional investments. The company behind this stablecoin is American, recognized and certified by the New York State Department of Financial Services. It is mainly used in CeFi platforms and much less in other exchanges.
Binance USD (BUSD)
BUSD is also provided by the company Paxos in collaboration with Binance. It does not differ significantly from USDP except that it is entirely related to the Binance ecosystem and Binance Smart Chain.
TUSD is issued by a regulated company, TrustToken. Its objective is to ensure maximum transparency and trust for users through fully liquid funds. The funds are not held by the company but are deposited in third-party escrow. Access requires the consent of TrustToken and the token holder, who has legal protection over their own funds.
It is the first crypto-backed stablecoin, created by the collateralisation of other crypto assets on the Maker platform. DAI is very dear to the purists of DeFi because it is entirely decentralized, not censorable, and not linked to any physical asset. It has stood up to crypto pumps and dumps like Ethereum without ever breaking away from the dollar. It is a revolutionary project but still in the “experimental” phase.
An example of an algorithmic stablecoin was UST. At the beginning of May 2022, UST suffered an intense shock that caused it to collapse, as it failed to guarantee the maintenance of the peg. Its operation was linked to the native coin LUNA, and the peg to the dollar was maintained in an algorithmic manner. When UST was worth less than $1, the user was incentivized to buy it and change it to LUNA with a ratio of 1 UST = $1 LUNA. In contrast, when UST exceeded $1, there was an incentive to change $1 of LUNA to $1 of UST. These transactions are referred to as arbitrage and have kept the value of this stable in the dollar for a long time until its collapse.
A depth-analysis of how stablecoins work.
In conclusion, it can be argued that the greatest risk to stability is the loss of the peg to the dollar, due to the actual lack of collateral.
CBDC and stablecoins regulation
Centralized finance (CeFi), especially after the LUNA-UST crash, was interested in the topic of stablecoin, both in terms of regulation and alternative solutions. Cryptocurrencies, by nature independent of the control of authority, are extremely difficult to standardize.
The European Parliament, however, is committed to ratifying the MiCa, already approved but applicable since 2024, which has also defined standards for the stablecoin, such as on reserves and daily flows.
In addition, some governments are experimenting with issuing a digital version of their fiat currencies: the so-called Central Bank Digital Currency or CBDC. The CBDC could be a competitor for centralized stablecoins, similar to the latter: created by private entities based on traditional currencies to make the global economy more accessible and inclusive.
CBDCs, for now, are being tested or researched, and the existing ones are based on blockchain or private DLT, called "permissioned". Centralizing control makes the solutions simpler and scalable but sacrifices the values of privacy, decentralization and transparency.
Is a stablecoin a centralized currency based on fiat currencies?
What are the real stablecoin, maybe only decentralized ones?
Probably, only time will recognize the best stablecoin in the most used one: will USDT and USDC maintain their domain, or will a new algorithmic solution give more stability?
What do you think about it?
Join our Discord community and share your thoughts!