The present bear market in crypto has caused significant volatility among stablecoins. If you’ve been paying attention to the market lately, you’re already aware of the spotlight on LUNA and the UST stablecoin. It’s practically hard for a crypto investor to avoid talking about stablecoins in this environment. However, if you’d like to understand more about digital assets and their role in the entire market, here’s a resource that can help.
What are Stablecoins?
Stablecoins are a fundamental element of the DeFi universe. They have all of the advantages of a cryptocurrency market, such as transparency, security, and anonymity, but none of the volatility and price changes that other cryptocurrencies, such as Bitcoin and Ethereum, suffer from. Like fiat currencies, stablecoins are governed by private groups, DAOs, and even consortia rather than a central bank.
Different types of stablecoins
Fiat-backed, crypto-backed, algorithm-backed, and commodity-backed stablecoins are the four main categories based on the underlying collateral. Let’s look at each of these types individually to see how they differ.
Stablecoins are guaranteed by fiat.
As collateral, these stablecoins are backed 1:1 by a fiat currency asset, such as the US Dollar, Euro, or Canadian Dollar. The underlying collateral is held by an issuer or financial institution off-chain. Some popular fiat-backed stablecoins include USDT, TUSD, GUSD, and PAX.
Stablecoins backed by cryptocurrency.
These stablecoins, unlike fiat collateral, are backed by on-chain crypto collateral. Because the underlying crypto assets are volatile, these stablecoins are over-collateralized, which means more collateral is required to issue them. DAI is the best example of crypto-backed stablecoins, with a 200 percent collateralized ratio. (You must deposit $2,000 in ETH as collateral to create $1,000 worth of DAI.)
Stablecoins using Algorithms
Specialized algorithms and intelligent contracts underpin these stablecoins, which govern and manage the price by growing or decreasing the total amount of tokens in circulation. These stablecoins have a market worth of $1, but they are not linked to any tangible fiat or crypto asset.
Market Cap and Usage of the Most Popular Stablecoins
Let’s look at the most popular stablecoins in market cap and liquidity. Here’s everything you need to know about stablecoins to get started:
Tether’s USDT is the most widely used digital asset in this category and is the world’s leading stablecoin in terms of market size, market share, and liquidity. Due to its strong liquidity is the most popular base currency for digital trading assets on prominent crypto exchanges, like KuCoin.
USDT is the most generally accepted stablecoin, allowing businesses and people to quickly send and receive cryptocurrency payments. Low transaction fees, rapid payouts, high security, and price stability are advantages of using USDT for digital transactions.
USD Coin (USDC)
The Centre Consortium, a member-based group, launched by Circle and Coinbase in 2018, creates and manages USD Coin (USDC). To keep the fiat-backed stablecoin USDC tied to the value of the US dollar, it is invested in dollar-denominated reserves.
It is the second most extensively used stablecoin and, after USDC, has the second most significant market capitalization. Leading crypto exchanges worldwide provide crypto trading pairs with USDC as the primary currency for trading on their platforms due to its strong liquidity.