Stablecoins

Stablecoins are cryptocurrencies whose price is pegged to another asset such as the U.S. Dollar. They’re “stable” because this 1:1 peg is not meant to fluctuate, making them a desirable alternative to more volatile cryptocurrencies.

As we learn in Econ 101, price stability is necessary for a currency to be a medium of exchange. This is partly why stablecoins often top other cryptocurrencies in trading volume. 

Further reading: How do stablecoins work? A guide to stablecoin cryptocurrencies

Quick facts

Ethereum is by far the most popular blockchain for stablecoins.

USDT (pegged to U.S. dollar) often has the highest trading volume of all cryptocurrencies. 

Common uses include: hedge against volatility, cross-border payments, and base currency for DeFi platforms

Stablecoins maintain their peg in different ways: Algorithmic stablecoins use smart contracts and algorithms to adjust supply, and Collateralized stablecoins (most common) use real asset reserves.

There are three types of collateralized stablecoins:

• Fiat-backed stablecoins use fiat currencies like USD or EUR as their reserve
• Crypto-backed stablecoins use cryptocurrencies like BTC or ETH as their reserve
• Commodity-backed stablecoins use commodities like gold or silver as their reserve

USDT and USDC

By far the two biggest stablecoins are USDT and USDC. 

USDT

Creator: Tether Limited
Year Launched: 2014
Audit Frequency: Quarterly
Price Peg: U.S. Dollar
Strength: Used more for trading/payments

USDC

Creator: Circle
Year Launched: 2018
Audit Frequency: Monthly
Price Peg: U.S. Dollar
Strength: Considered safest stablecoin

Further reading: USDT vs USDC: A stablecoin comparison

How did TerraUSD (UST) collapse?

If stablecoins are designed to be stable, how is it possible that TerraUSD broke its peg from the dollar
and collapsed in 2022?

It's important to note that maintaining a stablecoin peg is complicated, and deviations sometimes occur. Development teams work to address and rectify these deviations, but in the case of UST, it failed because:

• UST was an algorithmic stablecoin, which made its 1:1 peg more difficult to manage in the face of speculative pressure

• A few very large trades broke UST’s peg (see The Trades That Triggered TerraUSD’s Collapse by Chainalysis)

• Terra could not manage the issue, and UST went down a “death spiral”, which is when the price drops lower and lower as more people sell

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