Stablecoin
A cryptocurrency designed to maintain a stable value, usually pegged 1:1 to a fiat currency like the US dollar. Used for trading, payments, and as a safe haven from crypto volatility.
Last updated: January 5, 2025
What is a Stablecoin?
A stablecoin is a cryptocurrency designed to maintain a stable value relative to a reference asset, typically the US dollar. While Bitcoin can swing 10% in a day, stablecoins aim to always equal $1.
Why Stablecoins Exist
Use Cases
- Trading pairs - Trade crypto without converting to fiat
- Safe haven - Park funds during volatility
- Payments - Send “dollars” globally, 24/7
- DeFi - Lending, borrowing, yield
- Remittances - Cheap international transfers
Types of Stablecoins
Fiat-Backed (Centralized)
Backed 1:1 by real dollars in bank accounts.
Examples:
- USDT (Tether)
- USDC (Circle)
Pros:
- Simple mechanism
- Proven stability
- High liquidity
Cons:
- Centralized
- Require trust in issuer
- Can be frozen/blacklisted
Crypto-Backed (Decentralized)
Backed by cryptocurrency collateral, overcollateralized.
Example:
- DAI (MakerDAO)
How it works:
- Deposit $150 ETH
- Borrow $100 DAI
- Liquidated if collateral drops
Pros:
- Decentralized
- Transparent
- Censorship resistant
Cons:
- Capital inefficient
- Complex
- Risk during market crashes
Algorithmic
Use algorithms to maintain peg without collateral.
Examples (Historical):
- UST (failed spectacularly)
Cons:
- High risk
- Many have failed
- Death spiral potential
Major Stablecoins
| Stablecoin | Type | Market Cap | Issuer |
|---|---|---|---|
| USDT | Fiat-backed | $110B+ | Tether |
| USDC | Fiat-backed | $30B+ | Circle |
| DAI | Crypto-backed | $5B+ | MakerDAO |
| FDUSD | Fiat-backed | $3B+ | First Digital |
USDT (Tether)
Overview
- Largest stablecoin
- Most traded crypto
- Available on all exchanges
Concerns
- Reserve composition questions
- Regulatory scrutiny
- Never fully audited (attestations only)
Usage
- Primary trading pair
- Most liquid
- Available on Binance, all exchanges
USDC
Overview
- Second largest
- Issued by Circle
- More regulated
Benefits
- Regular attestations
- US-based company
- Trusted by institutions
Usage
- Preferred by US users
- DeFi standard
- Available on Coinbase
DAI
Overview
- Decentralized stablecoin
- Governed by MakerDAO
- Crypto collateralized
How It Works
- Lock ETH/crypto in Maker vault
- Borrow DAI against it
- Pay stability fee (interest)
- Return DAI to unlock collateral
Benefits
- No central authority
- Transparent
- Can’t be frozen
Stablecoin Risks
De-Peg Risk
Can temporarily lose $1 peg:
- Market panic
- Reserve concerns
- Technical issues
Centralization Risk
Fiat-backed stablecoins can:
- Freeze addresses
- Block transactions
- Be seized by authorities
Reserve Risk
If reserves aren’t actually there:
- Bank run potential
- Collapse like UST
Smart Contract Risk
For crypto-backed:
- Code vulnerabilities
- Oracle failures
- Cascade liquidations
UST Collapse (May 2022)
What Happened
- Algorithmic stablecoin lost peg
- Death spiral: depeg → selling → further depeg
- $40B wiped out
- Luna went to near zero
Lessons
- Algorithmic stablecoins are risky
- “Stable” doesn’t mean safe
- Research the mechanism
Using Stablecoins
On Exchanges
- USDT pairs most common
- USDC increasingly available
- Often zero-fee stablecoin trading
In DeFi
- Lending for yield
- Liquidity provision
- Collateral for loans
For Payments
- Send globally
- Faster than bank wire
- 24/7 availability
Stablecoin Yield
Where Yields Come From
- Lending to traders
- Liquidity provision
- Protocol incentives
Risk vs Reward
Higher yield = higher risk
- 3-5% - Lower risk
- 10%+ - Higher risk
- 20%+ - Very high risk (careful!)
Tax Considerations
Generally
- Not taxed for holding
- Taxed when converted to/from crypto
- Same as other crypto for taxes
Record Keeping
- Track cost basis (usually $1)
- Note any gains/losses from de-pegs
- Keep transaction records
Ready to Start Trading?
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