Stablecoins are digital assets designed to maintain a stable value by pegging to a reserve asset such as fiat currency, commodity, or algorithmic mechanisms. Their primary purpose is to mitigate the volatility inherent in traditional cryptocurrencies like Bitcoin and Ethereum.
Types of stablecoins
- Fiat-collateralised: These are backed by traditional currencies (for example, the US dollar or USD). Examples include USDT, USDC.
- Algorithmic: They rely on algorithms and smart contracts to manage supply and demand. An example is TerraUSD (prior to its collapse).
- Crypto-collateralised: Backed by cryptocurrencies, these are often over-collateralised to address volatility. An example is DAI.
- Commodity-collateralised: These are pegged to physical assets such as gold. An example is Paxos Gold (PAXG).
Fiat-collateralised stablecoins dominate the stablecoin market, typically accounting for over 90% of the total stablecoin market capitalisation. Tether (USDT) and USD Coin (USDC) are currently the largest stablecoins by market value, both pegged primarily to the USD, and they occupy the majority share of the stablecoin market.
- Introduction of USDT
Tether is a blockchain-enabled platform designed to facilitate the use of fiat currencies in a digital manner. Tether works to disrupt the conventional financial system via a more modern approach to money. Tether has made headway by giving customers the ability to transact with traditional currencies across the blockchain, without the inherent volatility and complexity typically associated with a digital currency. As the first blockchain-enabled platform to facilitate the digital use of traditional currencies (a familiar, stable accounting unit), Tether has democratised cross-border transactions across the blockchain.
- Introduction of USDC
USDC is a stablecoin that is pegged to the USD on a 1:1 basis. Every unit of this cryptocurrency in circulation is backed by USD1 that is held in reserve, in a mix of cash and short-term US treasury bonds. Centre Consortium, which is behind this asset, says USDC is issued by regulated financial institutions.