Stablecoins are digital currencies pegged to more stable assets like fiat currencies or, gold, or even other cryptocurrencies. As the name implies, they can offer stability in an otherwise volatile market.
Their added stability makes stablecoins attractive to crypto users and investors, especially for payments and financial transactions.
There are a few different types of stablecoins, and each has unique characteristics. We’ll break them down so you can understand the space effectively.
Stablecoins are typically categorized based on the type of collateral that backs them. The two most popular types or categories are fiat collateralized and crypto collateralized stablecoins.
Here’s what you need to know about their key differences.
These are the most straightforward and widely used type of stablecoins. They are backed by reserves of regular currency, such as the US dollar, held by a central issuer or bank.
Each stablecoin is supported by a reserve of a specific currency to maintain its value in line with the fiat currency. This direct backing makes fiat-collateralized stablecoins highly stable and trustworthy.
The most popular fiat collateralized stablecoins are USDT (Tether) and USDC (USD Coin).
Unlike their fiat-backed counterparts, crypto collateralized stablecoins are backed by other cryptocurrencies. They use over-collateralization to keep their value stable, as the reserve cryptocurrency can be unpredictable. In other words, the value of the crypto held in reserve exceeds the value of the stablecoins issued.
This type of stablecoin can be more decentralized and transparent, but also more complex and susceptible to market fluctuations.
A well-known example of this type of stablecoin is DAI, which is managed by MakerDAO.
Stablecoins continue to gain traction thanks to their versatility, utility, and other benefits. But there are also a few more specific benefits that explain why they’re so widely adopted.
Here are a few of the key advantages of stablecoins:
Stablecoins are a reliable option for purchasing and selling items. They maintain a consistent value, eliminating concerns about price fluctuations. This stability makes transactions more predictable and secure. You can confidently use stablecoins without the risk of sudden changes in value.
Many vendors are still hesitant to accept BTC or ETH as payment because of their volatility. Since stablecoins are less volatile, many merchants will accept them for transactions.
They’re also used extensively in decentralized finance (DeFi) as trading pairs.
For crypto traders and investors, stablecoins offer a safe haven during periods of high market volatility.
They can easily change their risky assets into stablecoins to keep their value safe. This gives them time to plan their next steps without worrying about sudden price changes.
This way, investors can keep their money in the “crypto ecosystem” more broadly, but minimize volatility and drawdowns.
Lastly, some stablecoins are made to help holders earn interest by working with DeFi platforms. This allows investors to grow their assets without directly engaging in high-risk trading activities.
We’ll explore some yield-generating stablecoins below.
Fiat-backed stablecoins are supported by traditional currency reserves held by a trusted institution. The reserves ensure that each stablecoin maintains its peg to specific fiat currencies like the US dollar.
Tether (USDT) is one of the oldest and most widely used stablecoins. It’s tied to the U.S. dollar and has many users because it was adopted early and works with big exchanges.
Despite concerns over transparency and regulatory scrutiny, USDT remains a popular option due to liquidity, price stability, and widespread acceptance.
Tether also offers commodity-backed stablecoins, like Tether Gold (XAUT), which are tied to tangible assets like precious metals. While less popular, these are another option for stability outside of traditional central banking systems.
USD Coin (USDC), issued by Circle and Coinbase through the Centre Consortium, is another leading fiat-backed stablecoin.
USDC is always worth one U.S. dollar because its reserves are checked regularly by outside auditors.
Its transparent operation and regulatory compliance have helped it gain significant market share as a trustworthy stablecoin.
Note: One common limitation of these fiat-backed stablecoins is that they typically don’t generate yield on their own. Instead, they’re often integrated into DeFi protocols, where users can stake or lend them to earn passive returns.
Unlike fiat-backed stablecoins, crypto-backed stablecoins use digital assets as collateral, which introduces a higher degree of complexity but also decentralization and transparency.
Let’s look at two types of stablecoins backed by crypto:
MakerDAO's DAI is a popular stablecoin backed by cryptocurrency. It uses smart contracts to keep its value equal to the U.S. dollar. Users put ether or other cryptocurrencies as collateral in a smart contract to get DAI.
To reduce risk, DAI requires users to deposit extra collateral compared to the stablecoin they want to create. This mechanism ensures that the stablecoin remains pegged to the U.S. dollar while minimizing the risks of market fluctuations.
Origin Dollar (OUSD) takes a novel approach by combining the transparency of crypto-backed stablecoins with yield generation. OUSD is fully collateralized by stablecoins like USDT, USDC, and DAI.
Unlike other stablecoins, OUSD continuously earns yield for holders through a rebasing mechanism that automatically distributes yield directly into wallets holding OUSD. The process leverages DeFi protocols to maximize returns, allowing holders to benefit from passive yield generation while maintaining a stable value.
You can learn more about OUSD’s governance here.
Another option worth discussing is algorithmic stablecoins. They’re designed to maintain their value through smart contracts that automatically expand or contract their supply based on market demand.
Unlike fiat or crypto-backed stablecoins, these rely on algorithms rather than collateral to stabilize their value.
However, the absence of collateral makes algorithmic stablecoins inherently riskier than other types. If the algorithm can’t adjust supply enough to meet market demand, the stablecoin could lose its peg, leading to significant volatility.
This risk was evident in high-profile cases like TerraUSD (UST), which de-pegged and collapsed, leaving investors with massive losses. Cases like that underscore the importance of collateralization. Having assets to back stablecoins ensures a more robust mechanism to maintain stability even during market volatility. Collateralized stablecoins offer a safety net that purely algorithmic models lack.
Origin Dollar (OUSD) is designed to provide both stability and passive income for its holders. Using a rebasing mechanism, OUSD automatically distributes yield directly to holders' wallets. The number of tokens increases over time based on the returns from DeFi strategies.
Unlike other stablecoins, OUSD doesn't require holders to reinvest manually, making it an effortless way to earn compounding interest.
The stablecoin is fully collateralized by a mix of leading stablecoins like USDT, USDC, and DAI. This diversified basket ensures strong security and stability while tapping into different yield-generating opportunities.
By leveraging reputable DeFi protocols, OUSD strategically places its pooled assets in lending and yield farming platforms that provide attractive returns while managing risk. Holders can earn automatic yield without the hassle of managing multiple platforms.
It’s an innovative stablecoin option for those seeking a simple, stable, yield-bearing asset.
What are the most common types of stablecoins?
The most common types of stablecoins are fiat-collateralized and crypto-collateralized stablecoins. Fiat-collateralized stablecoins are backed by traditional currency reserves. Crypto-collateralized stablecoins use digital assets as collateral.
How does Origin Dollar (OUSD) differ from other stablecoins?
Origin Dollar (OUSD) stands out because it automatically generates yield for holders through a rebasing mechanism. It's also fully collateralized by a basket of stablecoins like USDT, USDC, and DAI. It provides diversification and stability while maximizing returns through integration with DeFi protocols.
Is it safe to invest in stablecoins?
Popular stablecoins generally offer more stability than other cryptocurrencies due to their peg to fiat or digital assets. However, risks still exist, including smart contract vulnerabilities, regulatory changes, and market volatility. Choosing well-established, fully audited stablecoins like OUSD can help mitigate these risks.
