Stablecoins have risen from obscurity to a major sector in the cryptocurrency market. This type of cryptocurrency denotes any token pegged to a cash equivalent.
Stablecoins are a type of cryptocurrency that can represent a wide range of assets, from fiat currency to precious metals like gold. However, the market is largely dominated by stablecoins pegged to currency like the US Dollar. This is due to its positioning as the global reserve currency used by central banks.
The global stablecoin sector now boasts a market capitalization in excess of $130B. This meteoric growth can be attributed to the unique, diverse utility offered by these tokens.
There are a number of designs that stablecoins can use to maintain their dollar peg.
Fully collateralized stablecoins denote projects that are 1-to-1 backed by reserve assets. While these assets can vary, they generally comprise USD dollars or Dollar-equivalents, like bonds.
This means that in theory, holders can mint or redeem their stables in exchange for USD at any point in time.
While this structure is secure, it can be highly centralized and prone to an attack on their single point of failure. Algorithmic stablecoins emerged to create native decentralized alternatives. These are meant to maintain a dollar peg exclusively through coded supply and demand. At present, attempts to create algo stablecoins have largely failed, draining tremendous value from the space.
Stablecoins have enjoyed significant adoption due to their broad use cases.
The crypto space has become infamous for its highly volatile markets. In contrast to other cryptocurrencies, stablecoins should maintain a set value by design. This means that investors can use stablecoins to protect their capital against directional volatility.
Beyond offering investors a place to store their capital, stables have carved out a niche as a popular medium of exchange. While traditional banks take multiple days to execute cross-border transactions, stablecoins offer a mechanism to transfer the same value rapidly. This is particularly important in the context of an increasingly globalized world.
Achieving mass adoption for cryptocurrency is a complex undertaking. Stablecoins play a crucial role by acting as the on and off-ramp for many investors in the space. These rails garner billions of dollars in daily volume as people move their capital.
Stablecoins also function as a vital measure of value. In addition to BTC and ETH, stablecoins are commonly used in trading pairs on centralized exchanges.
Some may argue that the DeFi space would be vastly different without stablecoins. Dollar-pegged stables have formed the lifeblood of on-chain yield generation since 2020’s DeFi summer. Stablecoins are a staple of all aspects of DeFi, from lending to liquidity provision.
Stablecoins need to earn the trust of the market in order to become popular. Following the fall of Terra Luna and other algorithmic stablecoins, participants place an increased emphasis on transparency for popular stablecoins.
Primarily, investors need to see that a stablecoin is fully collateralized – backed 100% by a basket of reserves. The strength of this backing, and additional utility offered by a stablecoin, all contribute to its overall usage and popularity.
Tether (USDT) is the longest standing and most prominent stablecoin at present. The fiat backed stablecoin launched in 2014, and is the result of joint efforts from startup Realcoin and crypto exchange Bitfinex.
Tether uses a combination of cash, investments, secured loans, and US Treasury bonds as reserves. The company issues quarterly reports on its current reserves.
Redeeming USDT for cash is not a straightforward process. Users may only redeem values >100K USDT, and still need to pay additional fees in the process.
USDT has become a popular choice in countries wracked by spiraling inflation, and is commonly used to crowdfund disaster relief efforts.
USDT remains the largest stablecoin by market cap, with a current valuation of over $79B.
USD Coin (USDC) has emerged as Tether’s most significant competitor in recent years. USDC is issued by US-based blockchain firm Circle, and pegged to the US dollar. The protocol uses a mix of US Treasury bonds and cash as reserves.
Circle publishes monthly attestations detailing their reserves in a bid to bolster transparency.
USDC is the top stablecoin in DeFi, enjoying extensive use in peer-to-peer payments and investment strategies.
MakerDAO’s DAI is the most popular decentralized stablecoin to date. Unlike USDC and USDT, DAI maintains its dollar peg with a basket of crypto and traditional asset reserves. Rather than being algorithmic, DAI is over collateralized. The protocol is mainly backed by USDC and ETH, giving it a current collateralization of 179%.
While the protocol was initially backed exclusively by ETH, USDC was incorporated to bolster price stability.
The crypto-backed stablecoin, or crypto collateralized stablecoin, has enjoyed consistent adoption since launching in 2017.
Origin Dollar (OUSD) is a novel stablecoin with unique capabilities. OUSD has been developed to make stablecoin investing more seamless and encourage mass adoption.
OUSD is fully collateralized by reserves of USDT, USDC, and DAI. These reserves are put to work in carefully tailored DeFi strategies to generate yield for holders.
Importantly, OUSD removes the pain points from traditional staking by removing the need to lock up capital. OUSD holders are free to use their tokens as per usual, with yield being directly distributed to holders’ wallets.
In contrast to issuers like Circle and Tether, Origin has made OUSD entirely transparent on-chain. All of OUSD’s smart contracts are open source, allowing anyone to monitor the code and propose upgrades. Users can monitor all of OUSD’s key metrics by visiting the protocol’s analytics reports.
Additionally, OUSD’s governance is decentralized. Holders of the ecosystem’s governance token, OGV, can propose and vote on protocol decisions. OUSD’s strategies are determined via a weekly governance vote.
At present, OUSD offers the best risk-adjusted stablecoin yields in DeFi. The rewards and ease of use offered by OUSD make it a prime candidate for further disruption.
There’s a wealth of options to choose from when it comes to stablecoin investing. Beyond the projects mentioned above, there are many other competitors, including Liquity Dollar (LUSD) and new stablecoins being issued by Aave and Curve.
On a high level, it’s important to investigate the strength of a project’s reserves. At present, it’s a good idea to use fully collateralized stables. Given their track record, algorithmic stablecoins should be treated with the utmost caution.
It’s also good to keep in mind that you can easily switch between stablecoins depending on your needs. USDC and USDT may provide good places to store capital. However, you could also opt to earn interest on these idle funds by placing them in a protocol like OUSD.
This sector is renowned for its flexibility, and there are endless ways to harness its full potential. With stablecoins only set to grow in coming years, understanding what the space offers can give you a valuable edge.
What distinguishes a fully collateralized stablecoin from an algorithmic stablecoin?
Fully collateralized stablecoins, like Binance USD (BUSD), are backed by tangible assets such as cash or bonds, ensuring stability. Algorithmic stablecoins, on the other hand, adjust their supply using code, which introduces more risk.
How do stablecoins like USDT and USDC maintain their peg to the dollar?
Stablecoins such as USDT and USDC maintain their value by holding reserves equivalent to the issued tokens, which are frequently audited to ensure transparency.
What makes Origin Dollar (OUSD) unique among stablecoins for earning yields?
OUSD stands out by using assets like dai DAI, USDT, and USDC to automatically generate and distribute yields to holders' wallets, simplifying the process of earning passive income.
