Stablecoins explained: In simple terms, a stablecoin is a digital currency that retains its value because it’s backed by the value of an underlying asset, which can be anything from fiat currency to oil and gold, or sometimes even cryptocurrency.
For example, Tether (USDT) and USD Coin (USDC) are stablecoins backed by US dollars held in reserve. PAX Gold (PAXG), on the other hand, relies on a gold reserve to maintain a steady price.
In the 21st century, stablecoins are considered to be one of the major financial breakthroughs of the era:
- Stablecoins are great for traders or investors who need to “hold value” in a digital asset without the volatile price swings of cryptocurrency.
- Stablecoins offer new ways of earning interest (a.k.a. “yield”) at a time when traditional savings vehicles offer next to nothing. (See our page on Best Interest Rates.)
- Stablecoins also offer a cheap, fast, and accessible means of transacting value across borders.
In this piece, we’ll cover our list of best stablecoins, then explain more about how smart investors can use stablecoins to build wealth.
List of Top Stablecoins
|Number of social followers
|Quality of Team
|Paxos Standard Token is a payment platform complete with the PAX stablecoin backed 1:1 to the U.S. Dollar.
|The team backing Paxos is a mixed-bag with a wealth of expertise from tech and finance backgrounds
|PAX is backed 1:1 by a reserve of USD.
|True USD is a one-to-one stable currency that pegs its value to $1 U.S. per token.
|The young team behind this project boasts some of the most impressive technology names in the field, albeit with little financial experience
|Escrow: Each True USD is backed by $1 U.S. held in an escrow account by third parties. Qualifying institutions can participate in the True USD system, eliminating the need for trust in a central project (albeit replacing that with the need for trust in third-party accounting). With only two minor deviations, the price has remained stable within $0.02.
|USDC is a full reserve dollar stablecoin issued by the CENTRE Consortium.
|The CENTRE and CIRCLE team have founded and helped run numerous high-profile technology companies including Brightcove and Macromedia.
|Collateralized: Each USDC token has a corresponding $1 U.S. invested in an owned account. Decentralization will be ensured by allowing numerous different projects to join a network of USDC issuers overseen by the CIRCLE project, each of which maintains its own cash reserves to stabilize the tokens it issues. While the oversight of CIRCLE can insure against value fluctuation, allowing third parties to independently issue the USDC does invite potential concerns of individual error or bad actors.
|Dai is a decentralized stable currency which is pegged to the U.S. Dollar at a 1-to-1 ratio.
|MakerDao’s Founder has almost no experience, having graduated in 2014. It has made up for this lack by hiring other executive-level talent with a deep bench of relevant experience.
|Collateral Against Ethereum: To create Dai tokens users have to purchase and stake an equal value (in U.S. Dollars) of Ethereum tokens. As the price of Dai rises, users will be incentivized to create more. As the price falls, users will be incentivized to sell their assets back to the pool.
|Created by Gemini cryptocurrency exchange, the Gemini USD stablecoin claims to be the first U.S. Dollar-backed stablecoin to receive approval from a U.S. regulator and aims to be the most transparent stablecoin on the market.
|Gemini was founded by Tyler and Cameron Winklevoss, two Bitcoin billionaires with a rich background in business.This trickles down to the team who collectively possess high levels of experience.
|Collateralized: GUSD is backed 1:1 by real dollars in reserve, with monthly audits.
|Digix takes the idea of a blockchain gold standard literally, promising that each DGX token represents 1 gram of actual, solid gold in a vault in Singapore. The utility of this over purchasing gold outright or an options contract remains uncertain, but the mechanism is sound.
|Digix is run by a team with extensive experience in both finance and blockchain development at some of the world’s largest firms.
|Asset-Backed: A Digix token is minted once the underlying Proof of Provenance protocol confirms that a corresponding ounce of gold is in the vault. The price has fluctuated within approximately 25 percent since inception.
|Developed by Binance, one of the largest cryptocurrency exchanges in the world, BUSD is a fully-regulated stablecoin backed by U.S. dollars, issued via the Paxos Trust Company.
|As the world’s leading cryptocurrency exchange, Binance in partnership with Paxos have a wealth of industry-leading expertise.
|Collateralized: Each BUSD is backed 1:1 by a reserve of dollars held in the Paxos account.
|Huobi is one the Asia’s largest cryptocurrency exchanges, and in partnership with Stable Universal, the firms issued the HUSD stablecoin token as a means to uncouple for pre-existing 3rd party stablecoins, as well as gain exposure in DeFi markets and platforms.
|Singapore-based exchange Huobi has relished a market-leading position for some years.
|Collateralized: Every HUSD token is backed by U.S. dollars held in reserves by a regulated trust company.
|Tether is one of the most well-known, valued, and reliable stablecoins on the market.
|Bloomberg, among other outlets, has published very serious questions regarding the accounting practices of Tether. The company’s founders have a range of professional experience, ranging from fintech to retail.
|Collateralized: Each Tether token has a corresponding $1 U.S. invested in an owned account. While serious questions have been raised as to the company’s accounting practices in this regard, the token’s price has remained stable within $0.05.
|PAX Gold (PAXG)
|PAXG is an Ethereum-based digital asset backed by gold. As per the website, each token is backed by one fine troy ounce (t oz) of a gold bar. In this case, if you own PAXG, you also own the gold that backs it.
|The team backing Paxos is a mixed-bag with a wealth of expertise from tech and finance backgrounds.
|The team backing Paxos is a mixed-bag with a wealth of expertise from tech and finance backgrounds.
|Stably is a cryptocurrency pegged to the U.S. dollar, with each token set to $1.
|Stably has a team with experience in both technology and finance. While they have little background in blockchain, their c-level leadership has worked with impressive firms in this space.
|Collateralized: Stably will hold $1 U.S. in reserves for each token distributed with quarterly audits.
|Terra is a blockchain platform that has built numerous fiat-backed stablecoins to power global payments systems. The firm created the decentralized stablecoin, UST, so that it could be available to all developers and blockchains, with DeFi yield earning as a prominent feature. Interchain stablecoin products are at the core of the firm’s goals, as is working to solve scalability issues.
|Terra has a significant presence in the Asia-Pacific region. The team has notable experience in e-commerce, software engineering and business development.
|Collateralized: Terra UST is an algorithmic stablecoin. For every UST minted, $1 worth of the reserve asset $LUNA is burned.
Top Stablecoins by Size
To give you a visual of how the stablecoins stack up against each other, here’s a look at their market capitalization (or total amount held by investors):
Types of Stablecoins
Just as the government backs fiat currency, so too are stablecoins backed by some other asset or authority. Here are the types of stablecoins, and how they’re backed.
Fiat-backed stablecoins are associated with a particular fiat currency: US dollars, Euros, etc. Fiat-backed stablecoins offer better stability, especially compared to crypto-backed stablecoins. While cryptocurrencies come with wild price fluctuations, fiat-backed stablecoins come with minimal price fluctuations, as there’s a trusted currency behind them.
However, fiat-backed stablecoins are relatively new and come with a limited track record, so they’re not without risk.
Coinbase, one of the world’s largest cryptocurrency exchange platforms, offers a fiat-backed stablecoin called USD Coin. This coin can be exchanged on a 1:1 ratio with the US dollar. It is generally safe to use, as every USDC is backed by one US dollar.
As the name suggests, these are stablecoins “backed” by other crypto assets. Because cryptocurrency prices can be volatile, crypto-backed stablecoins are overcollateralized (meaning they keep extra crypto in reserves, in case of a market crash).
For example, to borrow $5 of a crypto-backed stablecoin, you may need to “put in” (or lock up) $10 of another crypto asset as collateral. If the underlying crypto asset loses its value, you still have a built-in cushion of $5. In general, this volatility makes crypto-backed stablecoins less reliable than fiat-backed stablecoins.
These stablecoins maintain their value through precious metals or other commodities such as real estate or oil. While these stablecoins are generally centralized, the centralization protects users from crypto volatility. Gold is the most popular commodity to be collateralized. Paxos Gold, Tether Gold, and Digix are three of the most liquid gold-backed stablecoins.
Commodity-backed stablecoins allow you to invest in assets that may otherwise be out of reach. For example, obtaining and storing a gold bar can be complex and expensive, so holding a “gold stablecoin” is an easier way to store value without having to buy the underlying commodity.
Algorithmic-backed stablecoins rely on specialized algorithms and smart contracts to manage the supply of tokens in circulation. For example, if the price of an algorithmic stablecoin is set at $1, but the stablecoin price rises higher, the computer algorithm will automatically release more tokens into the supply to bring down the price.
Alternatively, an algorithmic stablecoin will reduce the number of tokens in circulation when the market price drops below the price of the fiat currency it tracks.
Why Do We Need Stablecoins?
Here are some of the primary use cases:
- Safe Haven Asset: Unlike cryptocurrencies that fluctuate dramatically in price, those who use stablecoins to store value have minimal risk of loss.
- Payments: Businesses can benefit from accepting stablecoins as payment, allowing them to reduce transaction fees that come with typical payment processors.
- Instant Settlements: When settlements are paid out, they often can’t be immediately delivered because they’re subject to regular banking hours. Stablecoins operate on blockchain, meaning they run 24/7: parties can receive settlement immediately.
- Lending: Stablecoin lending is a high-yield opportunity for crypto investors, as it can offer double-digit interest.
- Escrow: Stablecoins automate the escrow process through smart contracts that evaluate escrow conditions without the use of institutional intermediation.
- Alternative Banking: 14.1 million American adults are unbanked. All you need is internet access to have a stablecoin “account,” opening financial access to all.
How Do You Make Money with Stablecoins?
Most people make their money with regular cryptocurrency through trading, mining, or staking, lending, or yield farming. Because stablecoins are tied to an asset, making money with stablecoin works a little differently. Here are the ways to make money with stablecoins:
- Staking: Staking involves helping maintain the flow of the blockchain network on a particular asset. In return, you earn compensation from income from the network. Essentially, you’re locking in your stablecoins to receive rewards. Examples of stablecoins that offer staking rewards include Binance, Tether, and PAX Gold. (See our guide to Best Crypto Staking Yields.)
- Lending: You can lend your stablecoins out to borrowers to earn money, with rates of return ranging from 5 to 12 percent. You can lend your stablecoin on many major crypto lending platforms, such as BlockFi or Celsius. (See our guide to Top Crypto Lending Platforms.)
- Yield Farming: Yield farming allows investors to earn money by lending stablecoins through smart contracts, like earning interest on a traditional savings account. (See our guide to Best Yield Farming Rates.)
The Case for Stablecoins
For a currency to work, it has to reliably store value. Savers need to feel confident that the amount of money they put in the bank on Monday will reasonably reflect their wealth on Friday. Both inflation and deflation need to stay under control.
That is why several digital currency projects have taken a new approach. Instead of replacing traditional money, they’ll work alongside it. “Stable cryptocurrencies” peg themselves to a fiat currency of choice, typically the dollar, and automatically adjust the number of tokens in circulation to keep the price stable.
It’s an approach taken by several countries, even before cryptocurrency was widespread. For example, Cambodia pegs its riel at 4,400 to one U.S. dollar. Their goal is to create an electronic wallet that serves as a bank account, not an investment portfolio.
Stablecoins just take this currency “peg” and put it into code.
How Price-Stable Are Stablecoins?
When looking at the prices of stablecoins on digital asset data platforms, you will notice that stablecoins often do not remain “stable” at $1.00. For example, at the time of writing this article, Tether (USDT), USD Coin (USDC), and the Gemini Dollar (GUSD) were trading at $1.01, $1.01, and $1.02, respectively.
The reason is that the issuers of dollar-collateralized stablecoins need to manage the supply of their coins through issuing and burning/redeeming to ensure the value of their coins maintains roughly one-to-one with the US dollar.
However, there have also been stablecoins that have lost their peg entirely. For example, Steem Dollars (SBD), a cryptocurrency of the Steemit network, was designed to maintain its value at one dollar. However, the startup behind the Steemit network eventually stopped managing the coin’s money supply and let the digital currency float freely. This caused the coin’s value to surge to $15 during the 2017 rally before it came crashing down to as low as $0.51.
Not all stablecoins are really 100 percent price-stable. Moreover, due to their centralized nature and occasional lack of transparency, some stablecoins are actually riskier than they may seem, even if their values oscillate closely around the $1 mark. Do your research and never invest more than you are willing to lose.
Want to know how digital currencies are transforming the world? Subscribe to Bitcoin Market Journal today!