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What is a stablecoin?

Stablecoins are a type of cryptocurrency designed to maintain a "stable value."

Unlike other cryptocurrencies such as Bitcoin and Ethereum, stablecoins are characterized by their value being pegged to "some form of asset," such as:

• 1 US Dollar = 1 US Dollar Stablecoin.
• 1 Euro = 1 Euro Stablecoin.

Through this pegging mechanism, stablecoins hold significant relevance in the blockchain and cryptocurrency space.

Why are stablecoins important, and what are their key functions?

1. Mediating Web2 and Web3: Stablecoins play a crucial role in Web3 by addressing the volatility of cryptocurrencies, making them suitable as a medium of exchange and reducing the risk associated with currency conversion.
2. Value Storage Tool: Stablecoins offer relative price stability, making them a preferred choice for storing value during market volatility and mitigating losses caused by cryptocurrency price fluctuations.
3. Cross-Border Transactions and Payments: Stablecoins simplify cross-border transactions, replacing complex bank wire processes. Notably, even Visa has begun collaborating with stablecoins, enhancing payment convenience.
4. Foundation for DeFi: Stablecoins are a fundamental component of Decentralized Finance (DeFi). Users employ them for various DeFi applications like liquidity mining, lending, and trading to earn stable returns.

What types of stablecoins are there?

Fiat-Collateralized Stablecoins: These stablecoins are backed by financial institutions or central authorities and maintain their value by holding fiat currency reserves. In addition to fiat currencies, they may also be collateralized by precious metals, oil, and other commodities. Regular audits are conducted to prevent issues like over-issuance.

Common examples of fiat-collateralized stablecoins include USD stablecoins (e.g., USDT, USDC, BUSD) and Euro stablecoins (e.g., EUROC, EURt).

Crypto-Collateralized Stablecoins

The value of these stablecoins is primarily supported by cryptocurrencies. Users are required to deposit a certain amount of cryptocurrency as collateral to obtain an equivalent amount of stablecoins. When redeeming stablecoins, the deposited cryptocurrency must be returned.

A well-known example of a crypto-collateralized stablecoin is DAI.

Algorithmic Stablecoins

The value of algorithmic stablecoins is stabilized through algorithm and smart contract mechanisms, regulating supply and demand. These stablecoins' prices fluctuate based on market dynamics, influenced by algorithm and smart contract controls.

Prominent algorithmic stablecoins include UST (transformed into USTC) and FRAX, among others.

Is stablecoin safe, and is there a risk of collapse?

The safety of stablecoins depends on their underlying collateral assets and algorithmic design. Fiat-collateralized stablecoins are generally considered safer due to their fiat currency reserves. However, there is still a risk of collapse, mainly stemming from:

Inadequate Value Reserves: If the value reserves supporting stablecoins are insufficient, especially when cryptocurrencies are used as collateral, their price can become unstable, leading to a collapse.

Hacker Attacks: If the reserve assets are subjected to hacking attacks or theft, it can result in a decrease in the value of stablecoins and a loss of trust.

Algorithmic Vulnerabilities: In the case of algorithmic stablecoins, if there are vulnerabilities in their design, it can trigger instability, causing fluctuations in the stablecoin's value.

Ranking of the Most Popular Crypto Stablecoins by Market Capitalisation

According to CoinMarketCap, the top five crypto stablecoins by market cap as of October 2023 are approximately as follows:

USDT - Tether Tether Coin

1.The largest stablecoin in terms of issuance and circulation.
2.Uses a fiat currency collateral model, indicating that it is backed by sufficient USD reserve assets.
3.The preferred stablecoin for market trading and a must buy for newcomers to the market.
4.Has been questioned for lack of transparency in real USD holdings.

USDC – USD Coin

• Backed by Coinbase and Circle, it is highly reputable.
• Also uses 1:1 USD collateral and publishes proof of reserves on a monthly basis.
• Widely used in decentralised finance.

BUSD – Binance USD（Stopped casting）

• Backed by CoinShares Distribution and tightly integrated with the buying platform.
• 1:1 USD collateral, monthly review by auditor.
  The most integrated stablecoin with the BNB ecosystem.
• BUSD Issuer Paxos Faces Possible SEC Suit Claiming BUSD is an 'Unregistered Security'
• BUSD is no longer minted, and CoinSec will stop supporting BUSD tokens in 2024.
• Paxos will end BUSD redemptions by February 2024.

DAI – DAI Stablecoin

• Generated through the Maker protocol's overcollateralisation mechanism, the collateral is a crypto asset.
• Embodies the spirit of decentralisation.
• Often used in the DeFi protocol.

TUSD – TrueUSD

• Legal tender collateral coins, deposited in a bank for third party auditing.
• Cold wallet storage of up to 95% for high security.
• User assets are protected by FDIC insurance for a high level of relative trust.

How to buy stablecoins

Stablecoins can currently be purchased in several ways:

• Exchanges: Currently the major cryptocurrency exchanges offer trading services for stable coins.
• OTC Over-the-Counter (OTC): buying and selling directly with the holder through private trading.
• Stablecoin issuers: Some stablecoin issuers offer to buy stablecoins directly.

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