Stablecoins: An Overview

[Hitchcock]

Stablecoins are a type of cryptocurrency designed to minimize volatility by pegging their value to a reserve of assets. These assets can be fiat currencies like the U.S. dollar, a commodity like gold, or other cryptocurrencies. Here's an overview of some well-known stablecoins in the market:

Stablecoins

1. Tether (USDT)

Tether is the most widely used stablecoin and often acts as a dollar substitute on many popular exchanges. It was the first major stablecoin in the market and is pegged to the U.S. dollar on a 1:1 basis. Tether operates on multiple blockchain networks, including Bitcoin (via the Omni Layer protocol), Ethereum (as an ERC20 token), TRON, and others.

2. USD Coin (USDC)

USD Coin is a stablecoin launched by the CENTRE consortium, a collaboration between Coinbase and Circle. Each USDC is backed by one U.S. dollar, which is held in a bank account by Circle. Like Tether, USDC operates on multiple blockchain networks, but it's primarily used on the Ethereum network.

3. Binance USD (BUSD)

BUSD is a U.S. dollar-pegged stablecoin issued by Binance in partnership with Paxos. Paxos Trust Company holds the U.S. dollar reserves for BUSD and also handles the issuance and redemption of the stablecoin. BUSD has been issued on Ethereum as an ERC-20 token and on Binance Chain as a BEP-2 token.

4. TrueUSD (TUSD)

TrueUSD is a U.S. dollar-pegged stablecoin backed by U.S. dollars held in escrow accounts. It's issued by the TrustToken platform, which issues asset-backed tokens that can be bought and sold around the world. TrueUSD provides regular attestations of its escrowed balance by independent accountants.

5. Paxos Standard (PAX)

Paxos Standard, like BUSD, is issued by Paxos Trust Company. Each PAX token is backed by one U.S. dollar, held in reserve by Paxos. It's built as an ERC-20 token on the Ethereum blockchain. Paxos Standard was one of the first regulated stablecoins to receive approval from the New York State Department of Financial Services (NYDFS).

6. Gemini Dollar (GUSD)

Gemini Dollar is a stablecoin issued by the Gemini cryptocurrency exchange, owned by the Winklevoss twins. Each GUSD token is backed by one U.S. dollar, held in reserve by State Street Bank and Trust Company. Like PAX, GUSD is also approved and regulated by the NYDFS.

 

Synthetic Stablecoins

Synthetic stablecoins are a specific type of stablecoin in the cryptocurrency world. Unlike fiat-collateralized stablecoins, which are backed by reserves of traditional fiat currencies, synthetic stablecoins are over-collateralized by other cryptocurrencies. These coins are generated through decentralized platforms using smart contracts that maintain their value relative to an underlying asset.

One of the major benefits of synthetic stablecoins is that they are completely decentralized and operate on-chain, meaning the entire process, including the issuance and management of these stablecoins, happens within the blockchain. This contrasts with fiat-collateralized stablecoins, which require trust in a centralized entity to manage reserves and maintain the peg.

Here are a few examples of synthetic stablecoins:

7. Dai (MakerDAO)

Dai, unlike the other stablecoins mentioned, is not backed by fiat currency but by other cryptocurrencies. Created by the MakerDAO system on the Ethereum blockchain, Dai is backed by collateral in the form of Ether (ETH) and other supported ERC20 tokens. It uses a complex system of smart contracts to automatically adjust its value and maintain a 1:1 peg with the U.S. dollar.

8. sUSD (Synthetix)

sUSD is a synthetic stablecoin created on the Synthetix platform, an Ethereum-based protocol for the issuance of synthetic assets. sUSD is pegged to the value of the U.S. dollar. Synthetix uses a pool of crypto collateral, SNX tokens, to back the value of its synthetic assets, including sUSD.

9. USDX (Kava)

USDX is the native stablecoin of the Kava platform, a cross-chain decentralized finance (DeFi) platform. The value of USDX is pegged 1:1 with the U.S. dollar. Unlike traditional stablecoins which are backed by reserves of fiat currency, USDX is over-collateralized by various cryptocurrencies like BNB, BTC, XRP, and others supported on the Kava platform. Users lock up their crypto assets into a Collateralized Debt Position (CDP), and in return, they can mint USDX tokens. The platform uses mechanisms like over-collateralization, stability fees, and automatic liquidation to maintain the stable value of USDX.

10. UST (Terra)

TerraUSD (UST) shows the danger of (synthetic) stablecoin. During the downtrend of Luna the number of LUNA Classic and UST tokens exploded, letting the value of UST impload. Today UST is traded at a low value often seeing larger price jumps. UST was a decentralized stablecoin pegged to the U.S. dollar and part of the Terra ecosystem, a blockchain protocol deploying a suite of stablecoins for e-commerce purposes. UST was aiming to peg through an algorithmic mechanism, adjusting the supply of the stablecoin based on demand.

 

Synthetic stablecoins offer the promise of decentralization and on-chain transparency, removing the need for trust in centralized entities. However, they are complex by nature and come with their own risks and challenges, such as smart contract vulnerabilities and volatility risks of the collateral. As always, you should perform their own due diligence and understand these risks before interacting with synthetic stablecoins or other DeFi protocols.