Must-have stablecoins in 2024: The comprehensive guide

What is a Stablecoin and Why Is It Important?

A stablecoin is a type of cryptocurrency designed to maintain a stable value by pegging to an underlying asset – usually fiat currencies like USD or EUR, or even commodities like gold. Unlike Bitcoin or Ethereum, which have volatile prices, stablecoins offer predictability in value, creating a useful bridge between the traditional fiat world and modern cryptocurrencies.

The importance of stablecoins lies not only in their stability. These cryptocurrencies play a crucial role in crypto transactions, allowing users to make cross-border payments quickly without relying on banking intermediaries. They are indispensable tools in the decentralized finance (DeFi) system, where price stability is a mandatory requirement.

How Stablecoins Pegged to Fiat Currency Work

Fiat-backed stablecoins operate on a simple mechanism: when you create a stablecoin, an equivalent amount of fiat currency is locked as collateral. Typically, the peg ratio is 1:1, meaning each stablecoin issued is backed by enough fiat currency as collateral.

For example, if you create 1 million USD-backed stablecoins, there will be 1 million USD held in reserve. This process is executed via smart contracts on the blockchain, ensuring transparency and automation.

However, history has shown that the peg ratio is not always perfectly maintained. There are cases where stablecoins “lose their peg” when the issuing organization faces financial difficulties or trust crises.

7 Stablecoins You Need to Watch

1. USDT – The Pioneer Currency

USDT is a stablecoin issued by Tether Limited since 2014, aiming to connect cryptocurrencies with the fiat world. It is the first USD cryptocurrency implemented on blockchain, allowing users to access USD without depending on any specific platform.

USDT has the largest market capitalization among stablecoins today, with reserves reported to exceed $86 billion as of the September 2023 reserve report. USDT’s success lies in combining the stability of fiat currency with the high liquidity of cryptocurrencies, enabling fast transactions with minimal global costs.

2. USDC – The Second Major Player

USDC, issued by Circle – a peer-to-peer payment technology company – in 2018, also pegged 1:1 to USD. The main difference is that USDC is managed by the Centre consortium, a non-profit organization involving multiple stakeholders in the industry.

With its current price at $1.00, USDC has become the preferred choice on most centralized and decentralized exchanges (DEX). Its high liquidity makes USDC a flexible trading tool on DeFi platforms.

3. TUSD – Key Features: Transparency and Security

True USD (TUSD) was introduced in 2018 by TrustToken and PrimeTrust, focusing on addressing trust and transparency concerns. Notably, all user USD assets are managed by a third-party escrow account, completely separate from the issuer.

A standout feature of TUSD is that it is the first stablecoin to implement real-time reserve verification by independent third-party organizations. Priced at $1.00, TUSD offers higher protection for token holders.

4. BUSD – Limited Effort

BUSD is issued by a blockchain organization and Paxos Trust, with a 1:1 peg to USD. Although it was once the fifth-largest stablecoin by market cap, its model has evolved. The supply of BUSD is determined by demand from users wanting to buy this stablecoin with fiat currency.

5. DAI – The Decentralized Approach

DAI stands out as the only fully decentralized stablecoin. Instead of being controlled by an organization, DAI is created through the Maker Protocol – a decentralized (Dapp) running on Ethereum.

Launched by MakerDAO in 2019, DAI is backed solely by crypto collateral assets – specifically Bitcoin or Ethereum locked in Maker Vaults. With its current price at $1.00, DAI allows users to generate a completely independent stablecoin without going through any intermediary organization.

6. eUSD and peUSD – Yield-Generating Stablecoins

A new trend in the stablecoin world is these cryptocurrencies capable of generating yields. eUSD and peUSD are provided by a decentralized platform, using Token Liquid Staking (LST) as collateral.

What’s special is that holders of these stablecoins can earn attractive yields – a rare feature among stablecoins. peUSD is considered an advanced DeFi utility version, creating a new pathway for users to maintain value stability while earning returns.

7. Synthetic USD – An Innovative Solution

Synthetic USD is an innovation in the stablecoin space, designed for those seeking USD stability but wanting to avoid traditional banking relationships. Its operation is based on holding two assets with inverse relationships.

For example, if you open a risk hedge order worth 100 USD Bitcoin through a derivatives exchange, when Bitcoin’s price rises, the hedge decreases in value accordingly, keeping your net position unchanged. A blockchain infrastructure company has integrated this technology into its platform, allowing users to access a stable USD price through Bitcoin.

Why Are Stablecoins Booming?

Key Role in DeFi

Decentralized finance (DeFi) is where stablecoins truly shine. DeFi is a new financial service system built entirely on blockchain, eliminating the need for trusted intermediaries.

In this model, stablecoins play an important role as collateral assets on lending platforms. Unlike Bitcoin or Ethereum, which are highly volatile, stablecoins have relatively stable values, helping to manage risks more effectively.

The Appeal of Dollarization

Stablecoins pegged to USD offer a unique opportunity to access the dollar, especially for users in emerging markets. In countries with volatile currencies or high inflation, holding stablecoins is almost equivalent to holding actual USD.

This is particularly important in countries where the local currency depreciates rapidly. Stablecoins enable people to preserve their asset value without relying on traditional banking systems.

Moreover, blockchain and stablecoins help expand access to the global economy for those previously isolated by high fees or banking barriers. With minimal transaction costs, users can participate more easily in cross-border trade.

Risks You Need to Know

Although stablecoins offer many benefits, they are not without risks.

Peg Loss Risk: The stability of stablecoins entirely depends on the reliability of the backing assets and the financial health of the issuing organization. If the backing assets sharply decline in value or the organization faces difficulties, the stablecoin may “lose its peg” and devalue.

Regulatory Risks: The cryptocurrency market is still relatively new, and global regulators are in the process of forming policies. Regulatory changes can significantly impact the utility and availability of stablecoins.

Network Congestion: Although transactions are usually fast, network congestion on blockchain can cause delays, inconveniencing those who need immediate access to funds.

How to Own Stablecoins?

The simplest way is to buy stablecoins through centralized exchanges, where you can use fiat money or swap other cryptocurrencies.

Additionally, decentralized exchanges (DEX) also offer stablecoins via peer-to-peer markets. DEXs are considered safer because users retain control of their private keys when conducting transactions.

Conclusion

Stablecoins have become an integral part of the crypto ecosystem. They provide a real bridge between the fiat world and digital assets, reducing some risks associated with the price volatility of traditional cryptocurrencies.

With the emergence of decentralized solutions like DAI and yield-generating stablecoins, this field continues to grow rapidly. As cryptocurrencies gain wider acceptance, stablecoins will continue to serve as a vital bridge between traditional finance and the digital future.

Before investing in or trading any stablecoin, ensure you conduct thorough research and understand the risks involved with each type.