December 26, 2023

Blockchain Basics Cryptocurrency and Tokenomics

Trending Stablecoins in 2024

Discover the leading stablecoins in our latest blog as we march into 2024. Gain insights into their significance and unique features and how it impacts the evolving world of decentralized finance or...

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Shardeum Content Team

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When we think about cryptocurrencies, we automatically associate them to be volatile. This discourages average people to invest, transact or even think about using crypto assets, thereby hurting the adoption and growth of the entire industry.

This led to stablecoins which, as Investopedia puts it, offers the best of two worlds – that of a cryptocurrency and that of a more stable asset or reserve currency like US Dollars. In other words you get your decentralization, security and privacy features of a crypto and the stability of a fiat currency/commodity like gold. This article aims to provide a comprehensive look at stablecoins, including their types, impact on society, and the top stablecoins to watch out for in 2023.

What is a Stablecoin, and why do they exist?

Stablecoins are, as the name suggests, a type of crypto asset that depends on a more stable asset for its value. Generally, these stablecoins are pegged to the US Dollar, where 1 USD backs one stablecoin. This is very helpful, as it helps make transactions and payments over the blockchain network easy to understand for the masses without worrying about volatility.

One significant difference between stablecoins and traditional fiat currencies is that a government does not issue these stablecoins. Most are issued by private companies, except for a few decentralized ones. Thus, it becomes essential for users/investors to understand the top stablecoins to consider for their financial perusal. In order to maintain the stablecoin to USD peg and keep the price stable, the project or the private company issuing the stablecoin has to hold an equivalent (or preferably, higher) amount of base assets (in this case USD).

Types of Stablecoins

Based on how these assets are maintained as collaterals by the issuing company, stablecoins can be broadly classified as:

1. Stablecoins Backed by Fiat :

As the name suggests, these stablecoins are backed by a traditional fiat currency (USD or Euro). Examples include USDT by Tether and USDC by Circle.

2. Stablecoins Backed by Cryptos :

These stablecoins are backed by crypto, as a result of which they are typically over-collateralized. This is done to ensure the stability in price is maintained, even if the underlying asset stays volatile due to market conditions. DAI issued by MakerDAO is a good example here.

3. Stablecoins Backed by Commodities :

These coins use precious metals like gold to maintain stable prices. PAXG by PAXOS is an example here.

4. Stablecoins Backed by Algorithms :

Algorithmic stablecoins use a mint-and-burn process, either by trader actions or through Protocol Controlled Value (PCV), to regulate their supply based on market demand. This mechanism is crucial for maintaining their peg to a target value. The intention remains the same: a stablecoin that is almost always equivalent to the price of a fiat currency or an asset like gold. Since the collapse of UST by Terra, which ran into significant de-pegging in 2022, FRAX and FEI are the other stablecoins that were more recently introduced/re-designed to mitigate the inherent risks and complications associated with algorithmic component and management of collateralization ratio.

5. Stablecoins Backed by Hybrid Models:

Stablecoins such as TUSD (TrueUSD) by Techteryx operate on a hybrid model combining elements of both fiat collateralization and algorithmic stabilization. They are typically backed by a combination of stable assets(s), held in escrow accounts with regulated financial institutions, and mint-and-burn mechanism to maintain the peg and its stability. So they can be considered as partly decentralized in comparison to the other largely centralized market players.

Top Stablecoins by Market Capitalization

Now, if you are looking for the best stablecoin to buy, here is a list of the top stablecoins for you by market capitalization.

1. USDT (Tether)

Although BitUSD was the first stablecoin to be created, the Tether Foundation was the first to create one of the most successful stablecoins. As per their website, Tether tokens are “100% backed by reserves that include traditional currency and cash equivalents, and may include other assets and receivables from loans made by Tether to third parties”. Launched in 2014, various sources suggest that Tether commands around 60% of the market share as of October 2023.

2. USDC (USD Coin)

USD Coin, i.e., USDC, has emerged as the biggest challenger to Tether’s market supremacy. USDC is founded and managed mainly by Circle. USDC’s market share is roughly 20%as of October 2023, making it the second most widely used stablecoin.

3. DAI

The top two are followed by DAI. It is managed by MakerDAO and as mentioned previously, is the top crypto-backed stablecoin in the market today. It is soft pegged to the dollar – all the DAIs in circulation are generated from the Maker Vaults, backed by a surplus of collateral crypto assets that its users deposit. Roughly 4% of the total stablecoin market share is held by DAI.

4. TrueUSD (TUSD)

As mentioned, TrueUSD (TUSD) operates on a hybrid, multi-pronged model combining elements of both fiat collateralization and algorithmic stabilization. Each TUSD is backed by one US dollar held in escrow accounts with regulated financial institutions. This provides a strong foundation for maintaining its peg to USD. Further, TrueUSD utilizes a dynamic fee mechanism to incentivize arbitrageurs to buy or sell TUSD, depending on its market price relative to the USD peg.

5. Frax (FRAX)

The FRAX stablecoin also operates on a hybrid model known as the fractional-algorithmic mechanism, which combines algorithmic and fully collateralized approaches. Around 80% of its circulating supply is backed by a basket of crypto assets like USDC and the remaining portion is stabilized algorithmically through dynamically adjusting the collateral ratio based on market conditions.

Its approach for collateralization, though, is unique in the way that it uses a two-token system comprising FRAX (the stablecoin) and Frax Shares (FXS, the governance token). The system’s collateral ratio, which is dynamically determined by the market demand for FRAX and FXS, dictates the amount of collateral (USDC, for instance) backing each FRAX token. The remainder of its value is stabilized algorithmically.

6. Liquidity USD (LUSD)

LUSD is a decentralized stablecoin issued by the Liquity protocol, primarily backed by Ethereum (ETH) deposits. It maintains a 1:1 peg with the US dollar through a system of over-collateralization alone (as of this writing), meaning users deposit more ETH value than the LUSD they generate. Key features of LUSD include 0% interest on loans and a low minimum collateral ratio requirement. This stablecoin enables users to leverage their ETH holdings for liquidity while maintaining stability through smart contract mechanisms. Its model is similar to the approach taken by FRAX minus the algorithm part.

How Will These Top Stablecoins Impact Society?

The Web3 world is created on the foundations of a decentralized money system. Stablecoins, in general, have been crucial in enabling users familiar with traditional financial systems to access and utilize cryptocurrencies.

The most common advantages include the following:

Transfer money cheaply across the world: Sending thousands of dollars at a transfer fee of just less than a dollar is now possible thanks to the power of Internet money through blockchain technology.
Earning passive income: Traditional banks offer modest yields on bank deposits when compared to yield farms offered by cryptocurrency exchanges and DeFi (Decentralized Finance) protocols. Since stablecoins have been traditionally used to convert fiat into crypto and vice versa, there is a huge market and demand for them. Cashing on that demand, crypto lenders and exchanges offer relatively higher APYs to users willing to lend their stablecoins for a certain period. However, as mentioned in this article, it comes with a risk due to the young and evolving landscape of the Web3 industry resulting in capital loss.
Trading: Stablecoins make trading in crypto pairs easier to understand since they are pegged to stable currencies.
Lend and Borrow from across the world: Lending and borrowing assets through various DeFi protocols makes financial services accessible and free from geographical restrictions and prejudice.
Transaction Speed: Within seconds, billions of dollars in value are efficiently sent across continents, vastly reducing time and effort.

Conclusion

As we look at the landscape of stablecoins in 2024, it’s evident that these digital assets have become a cornerstone in the evolving DeFi and the larger blockchain sector. The previous years have highlighted a range of stablecoins, each offering unique features from algorithmic mechanisms to robust collateralization, catering to diverse user and investor needs.

Their increasing adoption and integration into various financial applications signify a maturing market, further bridging the gap between traditional finance and the burgeoning world of decentralized finance (DeFi). Stablecoins, in their various forms, continue to shape the future of digital transactions, demonstrating the versatility and resilience of blockchain technology in the financial world.

FAQ

1. Are stablecoins on the blockchain?

Yes, stablecoins are typically minted and operated on blockchains. Blockchain technology provides a secure and transparent way to track the movement and ownership of stablecoins. Additionally, blockchains can help to automate the maintenance of stablecoin pegs, both in the case of algorithmic stablecoins and collateralization methods.

2. What blockchain do stablecoins use?

Stablecoins are issued on a variety of layer 1 blockchains. The decision to build on a specific layer 1 blockchain depends on several factors, including the technical requirements of the stablecoin protocol, the desired features, and the regulatory environment. Ethereum has been a popular smart contract platform for the top stablecoins. However with the introduction of more recent L1 chains like Algorand and Solana, many stablecoin protocols/projects had begun building on them.

But the best answer lies in the fact that since there are quite a few layer 1 and layer 2 blockchains in the industry today bringing their own value propositions and advantages over others, stablecoins, like other use cases, are focused on interoperability. This way, they get to service and leverage as many blockchains as possible and rightfully so.