Cryptocurrencies notorious volatility has fuelled demand for stablecoins. These are digital assets pegged to stable reserves like fiat or commodities. Currently, over 200 stablecoins exist, but only a handful dominate. Below, we dissect their types, top contenders, and challenges.
Fiat-Backed Stablecoins
Fiat-backed stablecoins mirror traditional currencies, offering stability through reserves. Each token equals one unit of a currency, typically the U.S. dollar. Issuers hold cash or equivalents like Treasuries to back every coin.
1. Tether (USDT)
Launched in 2014, Tether (USDT) dominates with a $141 billion market cap, claiming a 75% market share. Its 1:1 dollar peg relies on reserves, though audits have sparked debates. Nevertheless, USDT remains the most traded stablecoin globally.
2. USD Coin (USDC)
Managed by Circle, USDC operates across blockchains like Ethereum. Weekly attestations verify its reserves of cash and short-term U.S. Treasuries. With $56 billion in circulation, it’s a trusted alternative for risk-averse users.
3. First Digital USD (FDUSD)
FDUSD is a programmable stablecoin enabling financial contracts, custody services, and insurance without intermediaries. The reserves are managed by First Digital Trust Ltd., a Hong Kong-registered public trust, and financial institutions in Switzerland, Australia, and Hong Kong.
These stablecoins use cryptocurrencies as collateral, often overcollateralized to buffer volatility. For example, $150 in crypto might back $100 in stablecoins.
4. Dai (DAI)
Dai, built on Ethereum, uses crypto collateral but faces criticism for relying on centralised assets like USDC. Despite this, its $5.3 billion market cap underscores its DeFi appeal.
Algorithmic Stablecoins
Algorithmic models use code, not collateral, to balance supply and demand. However, failures like Terra’s UST highlight their fragility.
5. Ethena USDe (USDe)
Ethena Labs USDe is a synthetic dollar designed as a crypto-native monetary solution independent of traditional banking. It maintains peg stability through delta-neutral hedging, using crypto assets and short derivatives. Users can acquire USDe via permissionless liquidity pools, while whitelisted parties can mint and redeem directly through Ethena contracts.
Hybrid and Commodity-Backed Models
Some stablecoins blend collateral types or peg to commodities. For instance, Tether Gold (XAUT) ties to physical gold. Others, like Frax, mix crypto and algorithms.
The Stablecoin Trilemma
Stablecoins face a trilemma balancing stability, decentralisation, and capital efficiency. For example, Dai sacrifices efficiency for decentralisation, while USDT prioritises stability via centralization. Regulatory scrutiny and black swan events (e.g., bank collapses) add layers of risk.
Can Decentralised Stablecoins Compete?
Centralised stablecoins still rule, but innovations like RAI (non-pegged) and Frax (hybrid) are exploring new models. PayPal’s PYUSD indicates corporate interest in this space. For decentralised options to succeed, they must address the trilemma without collapsing.
In conclusion, stablecoins are crypto’s bridge to mainstream finance, yet their evolution remains turbulent. As regulators circle and tech advances, the race for a perfect stablecoin intensifies. One thing is clear: stability is anything but stable.
