Stablecoins have grown so rapidly that monetary authorities have been alerted to their existence and the possible risks they entail. If you believe US central bankers, stablecoins could threaten the entire financial system in the US. This article looks into what different kinds of stablecoins exist and the most popular coins on the market.
What kinds of stablecoins exist?
Stablecoins are essentially crypto versions of real-world fiat currencies such as the US dollar or the Euro. Their value is pegged to their fiat currency equivalent at 1:1, meaning that you can always exchange one unit of stablecoin for $1. The vast majority of stablecoins are dollar-denominated, although there are a few Euro or Pound-denominated stablecoins, as well as the existence of a couple of gold-backed coins.
We can divide stablecoins according to three different economic designs:
- Fiat-backed stablecoins
- Crypto-backed stablecoins
- Algorithmic stablecoins
Fiat-backed stablecoins
Fiat-backed stablecoins use fiat currency as the underlying security. Coin holders can receive the equivalent dollar value of their stablecoins at all times. For example, for every 1 million stablecoins, the company issuing the coin holds $1 million as a reserve. Although this mechanism functions well and is easy to understand, holders do have to trust the issuing party to have the reserves it claims to have. In the past, not all stablecoin issuers have been able to prove full fiat currency backing of their issued supply.
Crypto-backed stablecoins
Crypto-backed stablecoins use crypto assets as opposed to fiat currencies as security. These are often Bitcoin or Ether but can also be other stablecoins. Another difference is that smart contracts issue new coins, in contrast to humans controlling the supply for fiat-backed coins. A major downside of this type is its inefficiency. Crypto assets are volatile, requiring the stablecoin supply to be overcollateralised to account for price swings.
Algorithmic stablecoins
Algorithmic stablecoins are a more experimental type and less popular in terms of market capitalisation. They don’t have underlying collateral. Instead, an algorithm monitors the supply of coins on the market and manages the peg accordingly by issuing new coins or buying up existing supply, mirroring the function of a central bank. Though interesting, algorithmic stablecoins have not yet proven to be as stable as their collateralised counterparts.
The most popular stablecoins on the market
Tether (USDT)
The biggest stablecoin by market capitalisation was founded by a group of Bitfinex executives, itself a popular crypto exchange. This has led to much speculation about Tether’s legitimacy, and despite its explosive growth since its foundation in 2014, Tether has repeatedly been the target of prosecutors. Most recently, Tether had to pay a $18.5 million fine for irregularities in its books regarding insufficient collateralisation of its issued supply.
US Dollar Coin (USDC)
US Dollar Coin is the second-biggest stablecoin by market capitalisation. Founded by Circle, a payment company, and Coinbase, a cryptocurrency exchange, USDC hasn’t faced legal issues and has been steadily closing the gap to Tether.
Dai (DAI)
DAI is an algorithmic, crypto asset-backed stablecoin by the MakerDAO Foundation, a DeFi protocol, with the goal of creating a decentralised stablecoin. It is the most popular crypto-backed stablecoin, mostly backed by Ether and USDC, and has established itself as an alternative to its centralised, fiat-backed competitors.
Where can I purchase stablecoins?
To buy stablecoins, you must first open an account with a crypto exchange or a digital wallet where you can purchase coins directly. Some services may not be accessible in some locations, so ensure that the options you want are available where you reside. Centralised exchanges such as CoinSpot support more than 370 cryptocurrencies, including popular fiat-backed stablecoins, and CoinSpot fee structure is very competitive. You can use these exchanges to swap any tokens for most stablecoins.
