While cryptocurrencies are notorious for their volatility, a cluster of cryptocurrencies called stablecoins promises an escape from the chaos. Stablecoins try to remain pegged to another asset, such as the U.S. dollar or gold.
Stablecoins had grown to a $130 billion market by May 2023. The most popular USD-pegged stablecoins are Tether (USDT), USD Coin (USDC), Binance USD (BUSD), and Dai (DAI). Tether Gold (XAUT) and Pax Gold (PAXG) track the price of gold, and their issuers claim they’re backed by real gold bars stored in vaults.
The function of stablecoins is to protect traders from big market swings while allowing users to stay in crypto—a useful feature, given the costs of switching between crypto and regular money. Trading pairs for USD-pegged stablecoins, such as ETH-USDT or BTC-USDC, are some of the most popular.
Tether has long owned the lion’s share of the stablecoin market. It’s issued by a Hong Kong-incorporated company of the same name. Tether’s reserves previously have included riskier assets like commercial paper, but the company now claims they consist mostly of Treasury bills or cash and cash equivalent. But skeptics note the company has refused to subject itself to a professional audit.
USDC, issued as a joint venture between <a href="https://fortune.com/ranking/crypto/2023/coinbase" target="_blank" rel="noreferrer noopener">Coinbase</a> and Circle, is the second-largest stablecoin. The approximately 30 billion USDC in circulation are backed by about the same value in cash and U.S. Treasuries. Both USDT and USDC are centralized stablecoins, and their issuers can freeze assets at will to slow down potential criminals.
While centralized stablecoins are backed by real assets, decentralized stablecoins are backed by other cryptocurrencies. The largest, DAI, is almost entirely backed by cryptocurrencies, mostly USDC and ETH. DAI was created by MakerDAO, a lending protocol that issues the stablecoin to those providing ETH as collateral. To compensate for volatility, MakerDAO’s crypto reserves are worth significantly more than the DAI in circulation.
Other stablecoins are undercollateralized. Some, like algorithmic stablecoins, maintain their peg to another asset through code that alters the supply of the stablecoin and usually an associated unbacked cryptocurrency. These stablecoins are extremely risky and several of them have blown up, most notoriously TerraUSD (UST), which had a market capitalization of $18 billion in May of 2022 but is today worth nothing.
Lawmakers in the U.S. and elsewhere are exploring whether to make stablecoins part of the financial system—in part because they offer a faster and cheaper way to transfer money than older technologies like the bank-to-bank money transfer system ACH—though some traditional banks oppose these efforts.
Go deeper:
Stablecoins.wtf—stablecoins dashboard
See also:
What is USDC?
Crypto investing 101
What is Ethereum?
Try it:
MetaMask—a popular crypto wallet
Maker Governance—browse the governance forum of MakerDAO, issuer of Dai