Stablecoin is a cryptocurrency that has its price pegged to a fiat currency. The use of stablecoins has exploded in recent years.
The biggest stablecoins in the market are Tether (USDT), USD Coin (USDC), Binance USD (BUSD), Dai (DAI), and True USD (TUSD). Tether is the best-known stablecoin. USD Coin is the second largest stablecoin on the market. Dai is the largest stablecoin that is backed only by cryptocurrencies.
Algorithmic stablecoins have been mostly disappointing so far. The regulation of stablecoins is undergoing major changes in the United States and the EU. Stablecoins can be bought on all major crypto exchanges. There are also risks associated with stablecoins. The use of stablecoins will increase in the future – despite the risks and regulatory changes.
What is a stablecoin?
Stablecoin is a cryptocurrency that has its price pegged to a fiat currency. Most stablecoins are pegged to the US dollar, but there are also stablecoins pegged to other fiat currencies. When the price is pegged to a fiat currency it makes it possible for the price to remain stable. Hence, the name stablecoin.
The term stablecoin is also used incorrectly for wrapped tokens. A good example is wrapped Bitcoin (WBTC). It is a token circulating on the Ethereum network with a price pegged to Bitcoin. One WBTC equals one BTC. There are also gold-backed tokens in the market, such as Paxos Gold.
It is essential to understand the difference between a wrapped token and a stablecoin. As the name suggests, a stablecoin is a cryptocurrency with a stable, i.e. unchanged, price. On the other hand, the price of wrapped tokens fluctuates according to the underlying asset measured.
The table below lists the largest stablecoins on the market. They are all pegged to the US dollar.
|USD Coin||USDC||$33 billion|
|Binance USD||BUSD||$7 billion|
|True USD||TUSD||$2.1 billion|
The US dollar has dominated the stablecoin market since its inception. More than 95 percent of the market cap of stablecoins is pegged to the US dollar.
What are stablecoins needed for?
The use of stablecoins has exploded in recent years. The biggest factor has been the rapid growth of the DeFi market, i.e. decentralized financial services. Let’s go through the most common use cases of stablecoins, which include, for example:
- DeFi apps
- Money transfers and savings
- Asset management outside of the banking system
Stablecoins act as a substitute for the dollar (and other fiat currencies) in DeFi applications. Since DeFi services are independent apps on the blockchain, there are no traditional banking connections to them. Without stablecoins, the DeFi industry could not exist.
Below is a picture of the popular liquidity protocol Aave. Stablecoins like DAI (pictured) are a vital part of Aave’s ecosystem.
Stablecoins are like digital oil in the crypto market. In trading, the best liquidity and largest trading volumes are with USDT pairs. It is also easy for professional investors to withdraw stablecoins to their cold wallets at the end of the trading day.
The smart contract platform Tron has become surprisingly popular in stablecoin transfers in recent years. About half of Tether’s reserves are currently on the Tron blockchain.
Many residents of poor countries can use stablecoins to save dollars and thus escape the inflation of their local currency. Argentina and Turkey are good examples. Bitcoin and other cryptocurrencies are not suitable for most people due to too high volatility. Dollar-based stablecoins offer financial security to millions of people.
There is no reason to forget one of the most important features of cryptocurrencies – managing funds outside the banking system. When you store dollar-based stablecoins in your own wallet you are practically storing US dollars outside the banking system.
Many ordinary savers have woken up to a new reality with the 2023 banking crisis. People understand now that there is a non-zero possibility that your bank goes bankrupt and you lose your deposits. Stablecoins offer a solution to tackle this risk.
The biggest stablecoins on the market
The biggest stablecoins in the market are Tether (USDT), USD Coin (USDC), Binance USD (BUSD), Dai (DAI), and True USD (TUSD). We will introduce Tether, USD Coin, and Dai in more detail.
Binance USD has been the third biggest stablecoin on the market and a major challenger to USDC and USDT. However, things changed dramatically in the spring of 2023. The US administration sued Paxos, the company behind BUSD, for illegal securities issuance.
The market cap of BUSD has dropped significantly since the incident. BUSD will be taken off the market by the spring of 2024. For this reason, we will not introduce BUSD in detail, even though it is still about twice the size of Dai-stablecoin.
Tether is the best-known stablecoin. It was launched already in 2014. For the first years, Tether was circulating on the Omni Layer, which is an extra layer built on the Bitcoin blockchain.
Currently, more than 98 percent of USDT tokens are circulating on the Tron and Ethereum blockchains. Tron’s share is slightly higher than Ethereum, but this ratio has fluctuated slightly in recent years. Other blockchains are left with only a marginal slice.
The graphic below is from the Block’s stablecoin data center, which has a lot of good information about stablecoins. It shows the USDT supply by blockchain.
Tether has maintained its position as a leading stablecoin despite tons of negative publicity. Tether’s harshest critics have claimed for years that the USDT tokens are not fully collateralized. Yet, Tether has maintained its dollar peg without problems.
At the beginning of the 2020s, USD Coin emerged as a strong challenger to Tether. However, the US regulatory war against cryptos has significantly damaged its reputation in 2023. This has cemented Tether’s position as the leading stablecoin further.
Each USDT token is backed by one US dollar. These dollars ars are not just sitting on a back account doing nothing, but they are invested in US treasuries to earn yield. USD Coin is operated with the same principle. This is a very profitable business when interest rates are high.
USD Coin is the second largest stablecoin on the market. USD Coin was launched in the fall of 2018. It is operated by the US companies Circle and Coinbase. USD Coin set out to challenge Tether by offering investors a US-based and regulated alternative.
USD Coin’s popularity took off during the crypto boom of 2021. At its peak, USDC’s market capitalization rose to over $50 billion (see the graphic below). Currently, USD Coin’s market cap is just over $30 billion.
The regulatory war that started in the United States in 2023 has decreased the popularity of the USD Coin. The banking crisis that took place in March 2023 brought USDC into the headlines because more than three billion dollars worth of collateral was trapped inside the collapsed Silicon Valley Bank.
This crisis caused USDC to lose its dollar peg for a couple of days. The price of one USD Coin dropped all the way to 0.89 dollars. In the end, the US government did a bailout and saved SVB’s depositors. However, many investors were frightened by the situation and switched to competing alternatives.
Dai is the largest stablecoin that is backed only by cryptocurrencies. In this respect, Dai differs from the most popular stablecoins on the market. Dai is operated and governed by Maker DAO. It is a decentralized organization that manages the development of the Maker protocol and Dai stablecoin.
Dai is issued through over-collateralized loans. If you want to create $1000 worth of DAI tokens, you need to lock $1500 worth of crypto into Maker’s smart contract. At first, only Ether (ETH) was used as collateral, but nowadays other cryptocurrencies (and stablecoins) are used as well.
If the value of the collateral threatens to fall below the value of the loan, the collateral is sold on the market. The person who minted the DAI tokens can also add more collateral at any time to avoid liquidation.
Dai has held its dollar peg well during numerous market crashes. Its popularity is steady, but Dai is clearly smaller than US dollar-backed stablecoins in terms of size. Currently, the DAI token has a market cap of just over $5 billion.
Algorithmic stablecoins have been mostly disappointing so far. The market has seen many different algorithmic stablecoins, but they have had problems holding their dollar peg. The Terra UST stablecoin, which collapsed in the summer of 2022, is the most famous example.
Terra UST became the third-largest stablecoin on the market. It maintained its dollar peg through a separate LUNA token minting and burning mechanism. UST worked perfectly fine for a couple of years until it collapsed together with the LUNA token in May 2022.
The collapse of Terra did not completely destroy the market for algorithmic stablecoins. Frax is an example of an algorithmic stablecoin that is still running. However, such projects are plagued by a small market cap and too much fluctuation in the dollar exchange rate.
The idea behind an algorithmic stablecoin is to keep the price stable without fixed reserves. Usually, an algorithmic stablecoin is accompanied by a separate governance token. The reserve of the governance token is regulated to create incentives for the market participants to buy or sell. This, in turn, keeps the exchange rate stable in the dollar – at least in theory.
Regulation of stablecoins
The regulation of stablecoins is undergoing major changes in the United States and the EU. The situation in the United States seems really confusing because the country lacks regulation for the entire crypto market – not just for stablecoins. The situation in the EU, on the other hand, is much better.
The MiCa framework with a new stablecoin regulation will be approved in the EU in 2023. The companies issuing stablecoins face much tighter regulation, and the current operators have to apply for new stablecoin licenses.
At this point, it is good to highlight the EUROe-stablecoin launched by Finnish Membrane Finance.
Membrane Finance is excited to announce the launch of EUROe on Ethereum!
Read more at https://t.co/nV8dYKkBmK, and read the thread below to see how you can get started with $EUROe from today!
— EUROe (@EUROemoney) February 2, 2023
EUROe entered the market in the spring of 2023, and it is the first euro-based stable currency to meet the new EU regulations. You can read more about the project at euroe.com.
The situation in the United States, on the other hand, is uncertain. Many analysts believe that USD Coin will be favored by the US government, while Tether will suffer from the new regulations. A possible attack on the DeFi sector by the US administration could muddy the water further. This might have an effect on DAI’s popularity.
We will update this part of the article later when there is fresh information about the regulation. It is good for an investor to be aware of the changes taking place behind the scenes and to follow the development of the industry.
How to buy and store stablecoins
Stablecoins can be bought on all major crypto exchanges. The table below lists the best exchanges and shows the availability of the top five stablecoins in each exchange.
|Crypto exchange||Stablecoin||Rating as a stablecoin exchange||Visit website|
USD Coin (USDC)
Binance USD (BUSD)
True USD (TUSD)
USD Coin (USDC)
Binance USD (BUSD)
True USD (TUSD)
USD Coin (USDC)
Binance USD (BUSD)
True USD (TUSD)
Storing stablecoins is also easy. All major stablecoins circulate on the Ethereum network as ERC20 tokens, so they are supported by the most popular crypto wallets. Metamask, Exodus, Coinomi, and Trust Wallet are free and good wallets to store stablecoins.
The risks of stablecoins
There are also risks associated with stablecoins. Although they are theoretically safe and stable cryptos, history has proven that even a stablecoin investment can be risky. Next, let’s go through things that a stablecoin investor should keep in mind. Let’s look at the risks from the perspective of the largest stablecoins, i.e. USDT and USDC.
The biggest question is always related to stablecoin reserves. Will the issuing company be able to respond to every repatriation request and pay one dollar for one token if the market participants are in a panic mood?
In practice, the dollar reserves are invested in US government bonds. The interest paid on these bonds brings in hundreds of millions of dollars in revenue per quarter for both Tether and USD Coin. They should be liquid enough so that stablecoin issuers can sell them quickly to meet repatriation requests.
Currency risk is another thing to consider if you intend to keep large sums of money in stablecoins. The US dollar has traditionally been the safest currency, so USDT and USDC have practically helped investors hedge against currency risk. However, the situation may change in the future.
Do you want to keep the fiat part of your portfolio in a bank, cryptocurrency exchange, or in dollar-based stablecoins? This is up to each investor to decide. If it is about large sums and your time horizon is several years, the difference in the purchasing power can be tens of percent if you choose a euro-backed stablecoin over a dollar-backed stablecoin, as an example.
The third risk is related to stablecoin reserves. More than three billion dollars of USD Coin’s reserves were stuck in the vaults of the failed Silicon Valley Bank in the March of 2023. In the end, this situation was resolved, but a similar event may also occur in the future at other banks.
It is impossible for an investor to know exactly where the reserves of USDT and USDC are and what kind of risks are associated with them. It is good to be aware of the potential risks first, and then assess how you want to keep a large slice of your portfolio in stablecoins.
We recommend diversification. Why not split your stablecoin reserves between USDT, DAI, and USDC? Even if one issuer would have problems, your entire stablecoin balance wasn’t at risk. You can also diversify further to True USD and euro-based stablecoins.
Summary of stablecoins
The use of stablecoins will increase in the future – despite the risks and regulatory changes. Stablecoins are here to stay. The role of stablecoins is much bigger in trading and in the DeFi world than most people would think.
The regulation will be in the headlines in the coming years both in the US and the EU. The issuers of stablecoins will be subject to new laws and regulations. In the long run, this is a good thing. It will hopefully also resolve the never-ending speculations about Tether’s reserves.
It is also good to remember that the EU and the United States, despite their great importance, are only a part of the crypto world. Stablecoins are increasingly used in everyday life in poor Asian and African countries. There is a real use case for millions of people already.