Beginners Guide to Stablecoins

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Stablecoins have grown rapidly in the last 18 months, with a market cap of more than $100 billion.

This guide will teach you what stablecoins are, how they work, and what role they play in the cryptocurrency ecosystem. You will also find a list of stablecoins that are popular among cryptocurrency users.


What are stablecoins?

Stablecoins, as the name implies, are cryptocurrencies having a fixed price. Stablecoins are current forms of cryptocurrencies in which the coin's value is linked to relatively steady external assets, such as the US dollar or gold. They can even be linked to a "basket" of secure valuables.


Stablecoins are gaining popularity due to their combination of a backed-up reserve such as a fiat currency to achieve price stability.


Types of Stablecoin

Not all stablecoins are made equal. While most popular stablecoins are backed by US dollars stored in regulatory bank accounts, there are additional stablecoins with various stabilization procedures.


  • Fiat-collateralized stablecoins: These stablecoins use a fiat currency reserve, such as the US dollar, as collateral to issue an appropriate number of coins. Some are backed by a commodity, such as gold, silver, or oil, however, the majority of today's fiat-collateralized stablecoins employ dollar reserves.

  • Crypto-collateralized stablecoins: MakerDAO's DAI is an example of a crypto collateral-backed stablecoin. These tokens, like fiat-backed stablecoins, are backed by cryptocurrency reserves.

  • Algorithmic stablecoins: The tokens use a mechanically-generated algorithm to adjust the supply if needed, so as to maintain a pegged-asset price. Stablecoins do not require any reserves, but rather a system that works like a central bank.

  • Commodity-backed stablecoins: In place of fiat or cryptocurrency, these stablecoins use actual assets such as gold and other precious metals as reserves. Gold is the most commonly utilized commodity. Tether Gold (XAUT) and Paxos Gold (XAG) are two examples of commodity-backed stablecoins (PAXG).


List of Stablecoins

Tether USD (USDT), USD Coin (USDC), Binance USD (BUSD), and Dai are the four most valuable stablecoins in terms of market capitalization (DAI).


USDT

Tether USD (USDT) was the world's first stable digital currency backed by bank accounts holding US dollars. Tether Limited's USDT tokens were the first stable digital currency when they were released in 2014.

 Tether is currently the most popular stablecoin by trading volume, and it will continue to be so for some time. Currently worth over $60 billion, USDT is a multi-chain stablecoin.


USDC

This stablecoin was introduced by US Crypto Exchange, Coinbase and in collaboration with OTC-Circle is called USDC. It is made to be pegged to the dollar 1:1. Coinbase actually rewards its customers for keeping USDC in their exchange accounts.

A USDC is backed by a US Dollar that is held in a bank account, as detailed on Coinbase's website.


BUSD

BUSD is a decentralized digital currency created in 2019  by Binance and Paxos. In order to guarantee the BUSD's value, it is matched 1:1 to the US dollar. New York State's Department of Financial Services has regulated both Paxos and BUSD to ensure the safety of their customers.


DAI

Dai (DAI) is the most widely used crypto-backed stablecoin, aiming to maintain a 1:1 price correlation with the US dollar. Dai is an Ethereum-based ERC-20 token that was created by 

MakerDAO, a decentralized autonomous organization.

This is the first stablecoin that doesn't hold US dollars in bank accounts, unlike the other stablecoins in this article. A smart contract is used instead to control the supply of tokens.



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