The Crypto Stable Coins That YOU Need to Know About
In this small publication, I bring you some of the most used Stablecoins and their protocol nuances.
Stablecoins provide safe heaven from crypto volatility and usually are used as profit-taking tokens and bear market deposits.
In my personal portfolio, I have USDC & BUSD, both fully collateralized stablecoins.
Let's dive into them!
USDC, USDT, and BUSD
USDC, USDT, and BUSD are the three largest centralized stablecoins. Issued by off-chain entities, the trio are each (allegedly) backed 1:1 by fiat (i.e. “real” USD) collateral.
While more opaque and entirely centralized, this design has proven itself to be far and away the most scalable among stablecoins, as the three have a combined circulating supply of $144.2 billion — an ~80% share of the entire sector. Although the three cannot be audited on-chain, each has, to varying degrees, released attestations of their reserves, with issuers Circle and Tether holding low-risk, short duration assets such as commercial paper in order to generate revenue for themselves.
The deep liquidity of USDT and USDC in particular have allowed the two to build out substantial network effects, with the latter serving as the most widely adopted stablecoin on-chain (more on that later).
Decentralized Stablecoins (UST, DAI, FRAX, FEI, OHM)
UST was a decentralized, algorithmic, dollar-pegged stablecoin. native to the Terra ($LUNA) ecosystem. It has de-pegged from its value and soon will be defunt.
DAI is decentralized, dollar-pegged stablecoin by Maker DAO. DAI is overcollateralized, with users able to deposit different forms of collateral, such as ETH, into vaults to mint the stablecoin. A user must keep their position over collateralized, as when it falls below a set collateralization ratio, which varies by asset, it can be liquidated.
DAI is one of DeFi’s oldest and most battle tested stablecoins, with Maker known for its robust, decentralized governance system and best in-class risk management policies. This, along with widespread integrations across a variety of DeFi protocols, has enabled DAI to grow to a market cap of more than $8.13 billion, placing them fifth among all stablecoins and second among decentralized ones.
FRAX is a decentralized, dollar-pegged stablecoin. As its name suggests, the stablecoin is both partially collateralized and algorithmic with the amount of collateral in the system, known as the collateral ratio (CR), dynamically changing and set by the market based on supply and demand for FRAX. Similar to UST, a portion (i.e. 1 — CR) of the stablecoins is uncollateralized, with stability maintained through FXS, the seigniorage and governance token of the protocol, which is burned when new FRAX are created and minted to service redemptions.
Frax also uses what are known as algorithmic market operations (AMOs) to enact monetary policy. These AMOs allow the protocol to deploy FRAX and its reserves into various DeFi protocols such as Curve, Uniswap, and Aave to generate yield and help pursue strategic objectives
FRAX’s “best of both worlds” design, along with the use of AMOs and numerous partnerships, have allowed the stablecoin to scale its supply to more than $2.6 billion, good for 7th among all stablecoins, and at the second highest growth rate of the seven listed in this section over the past six months.
FEI is decentralized, dollar-pegged, and issued by Fei Protocol. The stablecoin is fully-backed, with users able to mint new units by depositing various assets which can at any time be redeemed 1:1.
FEI only accepts decentralized collateral, with ETH and LUSD making up the vast majority of its backing.
FEI helped to popularize the concept of protocol controlled value (PCV), as its reserves are managed by TRIBE token holders through decentralized governance (and in the future via a managed Balancer pool). This PCV is deployed into various DeFi protocols to earn yield, while the protocol itself can mint FEI, known as protocol-owned FEI, (POF) against excess reserves to provide liquidity to venues of their choosing.
Despite FEI being “just” the 11th largest stablecoin with a market cap of $566 million, the protocol has a warchest of $878 million when accounting for the combined value of the PCV and POF. This, along with synergies from their merger with Rari Capital (the team behind the permissionless money market protocol Fuse) to form the Tribe DAO, should provide Fei with the resources they need to grow their market share.
Keep it stable, keep it simple
This list is far from exhaustive but gives a decent overview of the most common and popular types of stablecoins currently in use. The simultaneous experimentation we see from these different strategies and protocols accelerates our collective advancement towards creating a decentralized and trustless standard that can give all participants secure and reliable access to the tools required to take charge of our financial circumstances. They’re not perfect yet, but we believe they’ll come close very quickly.
Last but not least:
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Opinions expressed here are not investment advice and are only for educational purposes. Investors should do their due diligence before making any high-risk investments in Bitcoin, cryptocurrency, or digital assets. Please be advised that your transfers and trades are at your own risk, and any losses you may incur are your responsibility.️