The Global Stablecoin Ecosystem
Stablecoin technology drives innovation, provides an on-ramp to the crypto ecosystem, and bridges traditional finance with DeFi.
Updated March 9, 2022 • 3 min read
Despite the rapid growth of digital assets, some concerns surrounding their volatility remain. Stablecoins address the desire for a solution that effectively bridges the gap between fiat currency and cryptocurrency. Stablecoins, or digital assets that hold largely consistent values, unlock extensive utility in decentralized finance (DeFi) and the wider blockchain ecosystem. The main types of stablecoins are fiat-collateralized and crypto-collateralized, while algorithmically managed and commodity-collateralized stablecoins are also emerging and driving innovation.
Benefits of Stablecoins
Crypto exchanges, institutions, large-scale payments networks, and decentralized finance (DeFi) applications use blockchain technology and cryptocurrency to deliver peer-to-peer (P2P) financial products and services. In contrast to centralized incumbents like banks and other traditional financial service providers, DeFi platforms operate without intermediaries.
Solutions that merge the utility of fiat currencies, like U.S. dollars (USD) or euros (EUR), with cryptocurrencies remain crucial to driving ecosystem growth by providing alternatives to store and transmit value on the blockchain. Stablecoins deliver on this requirement by pegging each token's value to another asset using collateral to achieve a 1:1 ratio. They enable 24/7 transfers of funds (outside of traditional finance business hours), facilitate payments for goods and services using a stable store of value, and allow for participation in DeFi lending, borrowing, and insurance. You can also use stablecoins to send money from one crypto exchange to another exchange.
However, not all stablecoins use the same price-preserving mechanisms. While the most popular stablecoins are collateralized using fiat (usually USD), others use existing cryptocurrencies or physical commodities like gold. Alternatively, algorithmic stablecoins employ the economic principles of supply and demand to maintain price stability.
An assessment of active stablecoin projects is a sound starting point for understanding the growth and utility of this important crypto asset. This assessment is an overview that includes the more prominent stablecoin projects and is not intended to be comprehensive.
Fiat-collateralized stablecoins are pegged to the value of fiat, most often USD. Fiat collateral remains in reserve with the central issuer and must reflect the number of corresponding stablecoins in circulation. It’s important to note, however, that not all fiat-backed stablecoins are the same. For example, some stablecoin issuers are more transparent about regulation and where the funds backing their stablecoins are held. Certain issuers will release third-party audit reports to publicly demonstrate their 1:1 peg. If an issuer holds $1,000 in reserve, only 1,000 stablecoins worth $1 each can be in circulation. The fiat collateral is not locked in smart contracts, so it exists off-chain, traditionally in a bank account. Traders can exchange fiat-collateralized stablecoins for other crypto assets or redeem them for traditional fiat.
Gemini Dollar (GUSD): GUSD was the first regulated stablecoin, built to achieve scalability and usability. GUSD is pegged 1:1 to the USD and backed by funds held by State Street bank. Accounting firm BPM conducts periodic audits of the company to ensure that USD reserves equate to GUSD tokens in circulation.
USD Coin (USDC): The USDC stablecoin is fully backed by assets in reserve and is exchangeable for USD on a 1:1 basis. USDC is governed by a membership-based consortium known as Centre. This body sets technical, financial, and policy standards for the stablecoin.
Pax Dollar (USDP): The USDP stablecoin operates on the Ethereum blockchain as an ERC-20 token. As a regulated stablecoin collateralized by USD, it combines the utility of cryptocurrency with the perceived stability of fiat. The Paxos platform is also used by other organizations to issue their own stablecoins.
Tether (USDT): The Tether stablecoin (USDT) is pegged to the U.S. dollar. An early mover in the stablecoin space, Tether has achieved widespread usage.
Binance USD (BUSD): Traders can purchase the BUSD stablecoin on the Binance exchange platform. This stablecoin is issued in partnership with Paxos Trust Company, which is responsible for holding the USD collateral in reserve that backs BUSD.
TrueUSD (TUSD): The TUSD stablecoin is an ERC-20 token pegged 1:1 to the USD. Holders of TUSD are protected against malicious use of the token. TUSD is the first asset built on the TrustToken Platform and provides real-time proof of funds in an escrowed bank account.
Crypto-collateralized stablecoins are a key element of the DeFi ecosystem. These stablecoins over-collateralize an existing digital asset to allow for the dynamic maintenance of a consistent market price. This structure provides a buffer against price fluctuations caused by the underlying collateral. To receive a crypto-collateralized stablecoin, you must lock your collateral tokens in a smart contract. The collateral is retrievable at a later date by paying stablecoins back into the smart contract, thus liquidating the position.
MakerDAO (DAI): MakerDAO uses smart contracts called Maker collateral vaults to collateralize and issue DAI tokens. To retrieve the original collateral, you pay the DAI stablecoin back into the smart contract. DAI is a popular crypto-collateralized stablecoin and has previously achieved a top-three position in the broader stablecoin market.
EOSDT Token: The EOSDT token lives on the EOSIO blockchain and tracks the price of USD. The token leverages both EOS and BTC collateral to enhance market liquidity and to enable EOSDT’s use across the DeFi ecosystem.
sUSD: As a synthetic asset or “Synth,” sUSD tracks the price of the USD, designating it as a stablecoin on the Ethereum blockchain. Synthetix is introducing the ability to use sUSD as collateral for ETH, emulating the structure of DAI. With this method, a trader can sell sUSD as collateral and receive ETH, in the same way collateral can be used to buy DAI.
Origin Dollar (OUSD): The Origin Dollar is a crypto-collateralized stablecoin backed by other stablecoins like DAI, USDT, and USDC. The protocol employs smart contracts to adjust the supply of OUSD, aiming to maintain a value of $1. When the protocol earns a yield, through parallel financial transactions such as lending OUSD on DeFi platforms, each holder earns more tokens worth $1 each, which are delivered to their wallets in real-time.
mStable (mUSD): The mStable platform provides liquidity shares that also function as stablecoins. The first asset on offer is mUSD, a stablecoin backed by alternative stablecoins like USDC, USDT, TUSD, and DAI. Traders who provide liquidity to the mStable platform earn rewards and can trade between collateralized stablecoins without slippage, ensuring value is not lost as a result of prices moving quickly before a trade is completed.
Commodity-backed stablecoins are backed by assets like silver or gold. As the market price for these commodities increases, traders benefit from an increase in the value of their fractional ownership of the commodity represented by their commodity-backed stablecoins.
Digix (DGX): Each DGX token is backed by 1 gram of gold and is redeemable for the underlying asset or collateral at current market prices. Digix holds only high-quality 100-gram Swiss gold bars with its custodian, The Safe House Singapore.
PAX Gold (PAXG): Each PAX token is backed by one fine troy ounce (t oz) of a 400 oz London Good Delivery gold bar, stored in Brinks vaults. Traders holding the PAXG stablecoin possess fractional ownership of the underlying gold held in custody by the Paxos Trust Company.
Algorithmic stablecoins are an emergent subsector of stablecoin technology that do not use fiat, crypto, or commodities as collateral. Instead, their price stability results from algorithms and smart contracts that manage the supply of tokens in circulation. An algorithmic stablecoin system will reduce the number of tokens in circulation when the price falls below the desired price. Alternatively, if the token price exceeds that desired price, more tokens are issued to adjust the stablecoin value downward, in accordance with the principles of supply and demand.
DefiDollar (DUSD): The DUSD stablecoin leverages Curve’s sUSD pool, also known as a Peak, to mint DUSD using DAI, USDC, USDT, or sUSD. To mint 100 DUSD, you’d need to fund a sUSD liquidity pool using an equal amount of two supported stablecoins — for example 50 DAI and 50 sUSD.
Ampleforth (AMPL): The Ampleforth platform incentivizes on-chain liquidity, issuing AMPL tokens as a reward for providing liquidity to automated market-making platforms (AMMs) like Uniswap. The more liquidity you provide, the greater your share of the AMPL pool. The Ampleforth protocol adjusts the supply of AMPL in response to demand, resulting in its stablecoin designation. These supply adjustments are universal and proportional to your ownership percentage.
Stablecoins: Bridging Crypto and Fiat
Of the stablecoins that maintain their use as a store of value, most fall into the fiat-collateralized category, although crypto-collateralized stablecoins like DAI aren’t far behind. Algorithmic stablecoins have started building out utility by leveraging DeFi protocols. However, algorithmic stablecoins have not yet achieved widespread adoption given that their use typically requires more advanced familiarity with blockchain tech.
Regardless of the type, stablecoins represent a large growth sector in digital assets. Stablecoin technology is a driver of innovation, provides a crucial on-ramp to the crypto ecosystem, and is bridging the traditional and decentralized financial infrastructure to build the foundation for the next era of money.
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