A Beginner’s Guide to Stablecoins

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Alex Lielacher

Stablecoins have experienced explosive growth in the last 18 months, totaling over $100 billion in market value.

In this guide, you will learn what stablecoins are, how they work, and what role they play in the crypto ecosystem. Additionally, you will discover a list of stablecoins that crypto users love.

What Are Stablecoins?

As the name suggests, stablecoins are cryptocurrencies with a stable price. Stablecoins typically achieve price stability by being backed by reserve assets, typically a fiat currency or a commodity.

The majority of leading stablecoins are backed by US dollar reserves to enable a 1:1 price parity with the US dollar.

Stablecoins have gained in popularity because they combine the trust and stability of fiat currencies, such as the US dollar, with the openness, programmability, and accessibility of cryptocurrency.

Types of Stablecoins

Not all stablecoins are created equal. While the majority of leading stablecoins are backed by US dollars held in regulated bank accounts, there are also stablecoins with other stabilization mechanisms.

  • Fiat-backed: these stablecoins are backed by fiat currencies, like the US dollars and other government-issued currencies. They hold their value almost exactly 1:1 to the reserve fiat currency. Examples of these are USDC, USDT, and BUSD.

  • Crypto-backed: these stablecoins are backed by other cryptocurrencies. They typically function like a fiat-backed stablecoin, except the reserve to guarantee the stability of these tokens is in cryptocurrency. Examples of a crypto collateral-backed stablecoin would be MakerDAO’s DAI.

  • Commodity-backed: these stablecoins use physical assets like gold and other precious metals as a reserve as opposed to fiat or crypto. The most popular commodity used is gold. Examples of commodity-backed stablecoins are Tether Gold (XAUT) and Paxos Gold (PAXG).

  • Algorithmic stablecoins: these stablecoins use an algorithm to keep the stability of the token. Simply, the code controls the demand and supply of the token to stabilize the token price.

The Role of Stablecoins in the Crypto Markets

The price stability that stablecoins bring to the table provides these digital currencies with a broad array of use cases. The most prominent stablecoin use cases include:

  • Traders can easily move in and out of risky crypto-assets on exchanges.

  • Stablecoins are now the most used for price quotations on crypto exchanges and in the OTC markets. Trading volumes on USDT/BTC are now bigger than USD/BTC, for example.

  • Investors use stablecoins as an on-ramp to DeFi.

  • Web 3.0 users use stablecoins as a transactional currency in DApps and on NFT marketplaces.

  • Individuals and businesses in unstable economies use stablecoins as a store of value.

  • Businesses and individuals use stablecoins for cross-border payments.

  • Crypto borrowers typically use stablecoins as collateral on DeFi lending platforms.

List of Best Stablecoins

The four leading stablecoins by market capitalization are Tether USD (USDT), USD Coin (USDC), Binance USD (BUSD), and Dai (DAI).

Let’s look at each of these in detail to help you understand the differences and similarities.

USDT

Tether USD (USDT) was the world’s first stable digital currency pegged to the value of the US dollar price when it launched in 2014. USDT tokens are backed by US dollars reserved held in bank accounts by Tether Limited.

It’s currently the largest stablecoin and accounts for a significant portion of the trading volume in cryptocurrency markets. Operating as a multi-chain stablecoins, USDT has a market capitalization of $60+ billion.

How Does USDT Work?

USDT is a digital currency that is able to retain its value because it’s backed by US dollar reserves managed by Tether. USDT is primarily used to trade against other cryptocurrencies, like BTC and ETH, and as a popular asset in the decentralized trading and lending markets.

Tether USD is available on popular cryptocurrency exchanges, including Binance, BitFinex, Coinbase, and Kraken. You can also get your hands on USDT by converting another cryptocurrency, like ETH, into USDT directly in your Trust Wallet.

USDC

USD Coin is the fastest growing fully reserve stablecoin backed 1:1 with US dollars reserve. The stablecoin was launched in September 2018 by a partnership between Circle and Coinbase to provide a US dollar-backed stablecoin with a high level of trust and transparency, thanks to its monthly reserve attestations by a leading auditing firm.

How Does USD Coin (USDC) Work?

USD Coin (USDC) functions as a blockchain-based token (such as an ERC-20 token on Ethereum) that can be used on a number of blockchains in addition to Ethereum, including Algorand, Stellar, Solana, and Tron.

USDC can be used for cross-border payments, trading against other cryptocurrencies, and stored to earn a yield or borrow in the DeFi markets.

BUSD

Binance USD (BUSD) is a digitized dollar launched in 2019 by Binance and Paxos. BUSD is backed 1:1 with US dollars. Paxos and BUSD are regulated by the New York State Department of Financial Services to protect users.

BUSD can be held as a hedge against crypto volatility and fiat currency devaluations. It can also be traded and used in the DeFi markets for borrowing or lending.

How Does BUSD Work?

BUSD is 100% backed by US dollars held in FDIC-insured banks, and monthly audits are done to verify the reserves. The token is available is issued as Ethereum (ERC-20), Binance Chain (BEP-2), and Binance Smart Chain (BEP-20) tokens.

DAI

Dai (DAI) is the market-leading popular crypto-backed stablecoin that aims to keep a 1:1 price-peg with the US dollar. Dai is an ERC-20 token on the Ethereum blockchain, issued and managed by MakerDAO, a decentralized autonomous organization.

Unlike the other stablecoins mentioned in this article, Dai doesn’t have US dollars held in bank accounts. Instead, it uses a smart contract to manage the supply of the token. For each minted DAI token, cryptocurrencies are deposited into its smart contract vaults.

One of the main features of DAI is that it isn’t operated by a group of co-founders. Rather, the software that manages the money supply is governed by the MakerDAO and Maker Protocol, which is made up of different individuals that run in a decentralized manner via the use of smart contracts. However, the MakerDAO was started by a Danish entrepreneur Rune Christensen in 2015.

How Does DAI Work?

DAI is a digital dollar on the Ethereum blockchain, controlled by code. The holders of Maker (MKR) vote on key decisions about the development of the stablecoin and the protocol that issues it, Maker Protocol.

To mint DAI, you have to lock up cryptocurrency in a smart contract vault. The code is able to keep a soft-peg of 1:1 ratio to the dollar by burning DAI when cryptocurrency is withdrawn from the vault and issuing new tokens when cryptocurrencies are added to its vault. Alternatively, you can swap any ERC20 token, like ETH, into DAI in your Trust Wallet app.

The key advantage of DAI is that it is not managed by a private company that manages reserves. The issuance and burning of tokens are publicly recorded on the Ethereum blockchain, making it more transparent.

Securely Store and Deploy Stablecoins in Trust Wallet

Trust Wallet is the leading multi-asset mobile wallet that allows you to store 160,000+ digital assets, including all leading stablecoins across all major blockchains they support.

What’s more, using the Trust Wallet DApp Browser, you can seamlessly deploy stablecoins in DeFi protocols or decentralized applications (DApps) with the click of a button on your smartphone.

To start using stablecoins, download Trust Wallet today.

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