Introduction

As cryptocurrencies became increasingly popular over the years, their use and adoption still face some entry barriers, especially due to the high volatility of assets. Volatility is what keeps institutional players (like banks, investments funds and other organizations) away from the crypto market, as they claim that the high fluctuations of the market inhibit its mass adoption. A way to get around this situation was through the creation of stablecoins.

These coins are most often pegged to fiat currencies, usually the dollar (USD) and there are dozens of them available in the market. It is important for an investor to know the main stablecoins and understand how they work.

What are Stablecoins?

We can define that stablecoins are a response to the call of cryptocurrency investors who are looking for a cryptocurrency equivalent to fiat currencies, for example, the dollar.

Stablecoins are cryptocurrencies with their value pegged to a specific asset: it can be gold, or other commodities, but it is usually a fiat currency as USD. Their main goal is to maintain a reliable value over time without volatility and be a way of transferring value easily.

A quick example of their use: suppose a Bitcoin investor wants to quickly convert their profits made from Bitcoin trades to a currency similar to the dollar (stable and easy to take profit), and after that invest elsewhere or just withdraw the profits to his bank account. Stablecoins were born especially to address this type of issue.

What are Stablecoins Used for?

Besides the solution mentioned above, stablecoins are also used by investors who want to protect their money from sudden fluctuations in values related to other cryptocurrencies. As a result, stablecoins can serve as a tokenized version of fiat currencies or even others that have an already established value.

There are decentralized financial platforms that use stablecoins to provide cryptocurrency lending to their customers, such as Nexo and Abra. One of the main reasons they make use of stablecoins is that the value of the guaranteed tokens is unlikely to change dramatically between the time a customer is approved for a loan and the cryptocurrency arrives in their digital wallet.

What are the Main Stablecoins?

Tether (USDT)

Launched in 2014, Tether was initially launched as RealCoin. Their product was initially limited to claimed dollar reserves only, with Tether said to be worth one US dollar. Tether also offers other stablecoins: EURT, CNHT, XAUT and MXNT.

Tether is currently one of the biggest stablecoins in the market. As years went by, the company ended up pressed by the market to compile its regulatory reserves reports to prove that its peg to the dollar could be maintained.

Tether CEO Paolo Ardoino confirmed in an interview with Bloomberg that the company is exploring opportunities in the commodities sector. He stated that these explorations are still early and may not disclose how much they intend to invest in commodities trading. However, they are actively developing a strategy and are interested in exploring various possibilities in commodities trading.

Investors can always check Tether’s transparency regarding their reserves. The values are published daily and updated at least once per day on their website.

USD Coin (USDC)

This stablecoin was founded by the partnership between an exchange and a mining company in September 2018. USDC is considered to be one of the safest and most reliable stablecoins, and its supply is limited to dollar reserves only.

USD Coin’s reserves are monthly audited by Grant Thornton LLP, and can be accessed on USDC’s transparency page.

In 2023, the collapse of Silicon Valley Bank (SVB) significantly impacted the crypto market, particularly affecting the stability of the USDC stablecoin’s value. Circle, the issuer of USDC, confirmed that it held $3.3 billion in funds at SVB, representing about 8% of its total reserves. Following news of SVB’s bankruptcy, market confidence in USDC was severely shaken, causing USDC to rapidly lose its peg, with its price dropping as low as $0.87.

This event triggered massive withdrawals by investors, leading USDC’s market cap to plunge from $43.5 billion to $37 billion. Due to SVB’s collapse, many users became concerned about the safety of their funds. Circle subsequently announced it would cover any shortfalls and planned to resume redemption services, but this incident highlighted the vulnerability of stablecoins to traditional financial risks. With regulators increasing their scrutiny of stablecoins, the USDC depegging event also sparked new discussions on the safety and transparency of crypto assets.

Binance USD (BUSD)

Launched in 2019 as a partnership between the exchange and Paxos, BUSD has limited offers for dollar reserves. BUSD’s reserves are monthly audited by Withum to ensure that the supply of the stablecoin is consistent with the USD in reserve accounts and the reports can be verified in Paxos’ attestation page.

Paxos, as the issuer of BUSD, was significantly affected by an SEC investigation. The SEC issued a Wells notice to Paxos, alleging that the issuance of BUSD might violate securities laws and requiring it to halt the stablecoin issuance. In July 2024, the SEC decided not to pursue further enforcement action against Paxos, but this process had already caused irreversible damage to BUSD’s market position.

Amid increasing regulatory uncertainty, BUSD’s market share quickly shrank, with trading volume and demand dropping significantly. In November 2023, Binance announced it would delist BUSD and discontinue trading pairs with other major cryptocurrencies, further diminishing BUSD’s market presence.

Dai (DAI)

Dai is a stablecoin powered by MakerDAO, an Ethereum-based protocol. The Dai Token was launched in 2017 and its supply is limited to the collateral stored in their vaults. It is important to mention that DAI’s collateral is backed by other cryptocurrencies, not US dollars, and this multi-collateral option summed up to the transparency via smart contracts has proven to be working so far. Also, users can vote for more collateral options in the MakerDao community.

Although this token can be used for trading, its use is more prevalent in DeFi protocol services, and since its launch, Dai has added a number of financial services. Also, any user can mint DAI tokens and deposit their Ether tokens as collateral.

On August 27, 2024, MakerDAO announced a rebranding to “Sky” and an upgrade of its stablecoin Dai to “Sky Dollar” (USDS). This move aims to reflect the project’s strategic transformation and brand refresh, aligning more closely with the evolving market environment and user needs. As a new stablecoin, USDS will continue to offer value pegged to the U.S. dollar while focusing on enhancing user experience and the sustainability of its ecosystem.

TrueUSD (TUSD)

With a limited release, TrueUSD has regular audit claims and was the first regulated stablecoin fully backed by US Dollar. Their audits point out that the offer is limited to the dollars they have. Its daily turnover is considered somewhat low, and TUSD enables DeFi and staking to earn returns from holdings.

TUSD’s reserves can be verified in real time through Armanino’s TrustExplorer.

TrueUSD (TUSD) is facing a severe financial crisis, with signs of depegging and unclear financial reporting. As market confidence in TUSD declines, users question its assets’ transparency and security, leading to significant value fluctuations.

On September 24, 2024, the U.S. Securities and Exchange Commission (SEC) announced settled charges against TrueCoin LLC and TrustToken Inc., accusing them of fraudulently and unregistered selling investment contracts involving the stablecoin TrueUSD (TUSD) from November 2020 to April 2023. The SEC stated that these companies falsely promoted TUSD as fully backed by U.S. dollars or equivalents. In contrast, most assets were invested in high-risk offshore speculative funds, exposing investors to significant undisclosed risks. As part of the settlement, TrueCoin and TrustToken agreed to pay civil penalties of $163,766 each, with TrueCoin also required to pay $340,930 in disgorgement and $31,538 in interest. All settlement agreements are subject to court approval.

Gate USD (USDG)

USDG (Gate USD) is a USD pegged stablecoin managed by Gate.io and generated by overcollateralized pledging multiple blockchain assets. USDG is part of Gate.io’s ecosystem, stored as a crosschain asset in multiple chains, such as Gatechain and Ethereum.

The TerraUSD (UST): Why did it collapse?

TerraUSD (UST) was launched in September 2020, and brought to the market a disruptive way to maintain its indexation of one UST per dollar. The supply on this stablecoin changed algorithmically, based on the value and supply of the Earth-native LUNA token, so that the system automatically caused a balance that maintained its price: it is a “mint/burn” mechanism to adjust the balance without further deviations from the 1:1 peg.

In May 2022, due to the high market volatility and a bear market trend in general, the balancing mechanism failed: the demand for UST fell considerably and there was a huge sell pressure on Luna token:

$150M UST were withdrawn from the Curve Wormhole pool by Terraform labs to prepare for the 4pool launch;

$350M UST were sold for USDC on Curve by a supposed ‘attacker’. This led to a significant imbalance between the two assets in the pool: UST, 85% and 3CRV, 15%.

After the first signals of de-pegging (falling below $1 at a considerable rate), there was a bank run on Anchor: users rapidly swapped what they had of UST.

Ethena USDe（USDE）

Ethena USDe is an algorithmic stablecoin introduced by Ethena Labs, designed to maintain a 1:1 peg with the U.S. dollar. Its unique mechanism allows users to stake Ethereum, using these funds to hedge price risk by shorting perpetual contracts to maintain its dollar peg. Throughout this process, Ethena remains delta-neutral, balancing long and short positions, enabling users to benefit from both market directions.

The concept behind USDe is to create a crypto-native solution independent of the traditional banking system. Ethena aims to provide users with a new financial tool through this mechanism. To further enhance USDe’s stability and market acceptance, Ethena Labs plans to include Bitcoin as a reserve asset for USDe. This move will meet the unprecedented growth demand since USDe’s launch and boost its market cap. Despite USDe’s strong growth momentum, it faces potential challenges, including market volatility, liquidation risks, and reliance on centralized exchanges.

PayPal USD（PYUSD）

PayPal USD (PYUSD) is a stablecoin introduced by PayPal, designed to offer users a convenient and secure digital payment method. PYUSD is pegged 1:1 to the U.S. dollar and fully backed by U.S. dollar deposits, short-term U.S. Treasury bills, and cash equivalents. Issued by Paxos Trust Company, PYUSD allows users to exchange 1 PYUSD for 1 U.S. dollar on the PayPal platform. Users can buy, sell, and transfer PYUSD through the PayPal app or website, and there are no fees for sending PYUSD to friends and family within the United States.

PYUSD is designed to simplify the use of digital currency, seamlessly bridging fiat currency and the Web3 ecosystem. Users can transact on the PayPal platform and transfer PYUSD to Ethereum wallet addresses supporting the token. PayPal also plans to integrate PYUSD with its mobile payment service, Venmo, to provide greater convenience for more users.

PayPal CEO Dan Schulman stated that PYUSD offers consumers and merchants a stable digital currency tool and aims to reduce payment barriers in virtual environments, enhancing the user experience. As more people engage with cryptocurrency, PYUSD is expected to play a significant role in the future of payment systems.

First Digital USD（FDUSD）

First Digital USD (FDUSD) is an algorithmic stablecoin issued by FD121 Limited, designed to provide a reliable digital currency pegged 1:1 with the U.S. dollar. As a product under the Hong Kong-based brand First Digital Labs, FDUSD’s main goals are to reduce crypto market volatility and enhance financial transaction efficiency. Each FDUSD can be redeemed at a 1:1 ratio for U.S. dollars, with its reserve assets securely held in segregated bank accounts and monitored and audited by independent third parties such as Prescient Assurance.

One key feature of FDUSD is its programmability, allowing users to execute various financial contracts, escrow services, and insurance without intermediaries. This flexibility increases the efficiency of financial operations involving FDUSD. Additionally, FDUSD supports cross-border transactions, significantly reducing the fees and processing time associated with traditional payment methods.

Conclusion

Stablecoins are now a fundamental part of the cryptocurrency economy, which seeks to provide a safe and reliable medium of exchange for investors and traders. Policymakers are increasingly attentive to the ups and downs of cryptocurrencies, which is an excellent sign for the crypto sector, given that stablecoins are a necessary component for strengthening the cryptocurrency economy, especially when the market is in a downtrend.

Still, stablecoins have a lot to evolve, especially to ensure that there will always be reserves that can maintain the peg, which will bring trust in the market and attract institutional players to it. Investors should also be aware of what is the mechanism behind each stablecoin before choosing which ones they will rely on.