People usually think that cryptocurrencies are characterized by large price fluctuations, but this is not the case with stable coins that are also digital tokens. Stablecoins are usually anchored to fiat currencies such as the US dollar or other assets with stable value, thus bringing a rare stability to the cryptocurrency market. People anywhere in the world can hold stablecoins as a synthetic asset pegged to fiat currencies. For example, USDT will try to anchor the price of the U.S. dollar. With the increasing demand for stable assets in the blockchain, the total value of stable coins has exceeded 30 billion US dollars, and stable coins have also begun to be widely adopted in DeFi (decentralized finance) applications.
Stablecoins have now become one of the largest and fastest growing tracks in the cryptocurrency industry, with a total market capitalization of more than $175 billion, a figure that has increased by about 182% in the past 1 year and 1750 in the past 2 years. %.
Meaning of stablecoins
A stablecoin is essentially a cryptocurrency with the property of “pegging”, the goal of which is to anchor an off-chain asset and maintain the same value as it. In order to maintain price stability, stablecoins can be collateralized by off-chain assets (ie, collateralized stablecoins), or adopt an algorithm to adjust the supply and demand relationship at a certain point in time (ie, algorithmic stablecoins).
There are currently two types of stablecoins, namely centralized stablecoins and decentralized stablecoins. Centralized stablecoins are usually collateralized by fiat currencies, which are mortgaged in off-chain bank accounts as reserves for on-chain tokens. This usually requires some trust in the custodian, but now the custodian does provide some level of transparency through solutions such as Chainlink Proof of Reserves (more on this later). In addition, centralized stablecoins can usually be over-collateralized with on-chain cryptocurrencies, and need to ensure a sufficient mortgage rate (for example, requiring users’ mortgage assets to exceed 150% of the total loan value). Decentralized stablecoins are more flexible and transparent in design, because they are not controlled by any party, and anyone can audit the protocol’s mortgage rate on the chain.
Another stablecoin that is gaining more and more popularity is the central bank digital currency (CBDC). The central bank digital currency has certain similarities with the centralized stable currency, but the difference is that it is issued by the central bank, so it does not need to be linked to the legal currency of the off-chain bank account. The central bank’s digital currency is a government-approved legal tender that can be used for large-scale retail payments between individuals and wholesale payments between banks.
USDC, USDT and BUSD
USDC, USDT, and BUSD are the three largest centralized stablecoins. Issued by off-chain entities, all three are (allegedly) backed 1:1 by fiat (i.e. “real” USD) collateral.
This leads to opacity and complete centralization, but this design has also proven to be the most scalable solution among stablecoins, with a combined $144.2 billion in circulation of the three — about 80% of the industry.
While the three corporate entities cannot be audited on-chain, each has issued proofs of their reserves to varying degrees, with USDC, USDT issuer Circle and Tether holding low-risk short-term assets such as commercial paper in order to protect themselves generate revenue.
In particular, the deep liquidity of USDT and USDC allows both to build substantial network effects, the latter being the most widely adopted stablecoin on-chain (more on this later).
Decentralized stablecoins (UST, DAI, FRAX, FEI, OHM)
UST is a decentralized, algorithmic, dollar-pegged stablecoin.
UST uses a simple minting and burning mechanism to maintain stability. To mint UST, users must burn LUNA (the native asset of the Terra blockchain, the stable currency UST is issued on Terra), and the burned LUNA is the same as what they want to mint. The number of UST units is equal (ie 1:1).
Likewise, users can redeem their LUNA by burning an equal amount of UST.
As we have seen, UST is not backed by any exogenous collateral. Instead, it relies on arbitrage to maintain its stability, and when UST trades above the peg, market participants are incentivized to expand the supply by minting new UST to lower the UST price, and vice versa.
Many in the industry believe that this design has its own set of significant risks, which came quietly after UST rapidly expanded to more than $20 billion in circulating supply. On May 10, Terra Ecosystem’s native algorithm stablecoin UST suffered a serious de-anchoring event due to capital hunting and debt crisis, and the minimum value fell to $0.2. (Friends who are interested in the whole risk outbreak can search and view in related media)
DAI is MakerDAO’s decentralized, dollar-pegged stablecoin. DAI is overcollateralized, and users can deposit different forms of collateral, such as ETH, into the vault to mint stablecoins. Users must keep their positions over collateral, because when it falls below a set collateral ratio (which varies by asset), the protocol can liquidate users’ collateral assets.
DAI is one of DeFi’s oldest and most proven stablecoins, and Maker is known for its robust decentralized governance system and best-in-class risk management policies, which, combined with the extensive integration of DAI and various DeFi protocols, enables DAI’s market cap grew to over $8.13 billion, ranking 2nd among all stablecoins and 2nd among decentralized stablecoins.
FRAX is a decentralized, dollar-pegged stablecoin. As the name suggests, the FRAX stablecoin is both partially collateralized and algorithmic.
The amount of collateral in the system is called the Collateral Ratio (CR), which is dynamically changed and set by the market based on the supply and demand of FRAX. Similar to UST, a portion of the FRAX stablecoin (i.e. 1-CR) is uncollateralized, stability is maintained through FXS (the protocol’s seigniorage and governance token), and when new FRAX is created and redeemed for services, The corresponding FXS is burned.
FRAX also uses so-called algorithmic market operations (AMO) to set monetary policy. These AMOs allow protocols to deploy FRAX and its reserves into various DeFi protocols like Curve, Uniswap, and Aave to generate revenue and help achieve strategic goals.
FRAX’s “best of both worlds” design and the use of AMO and numerous partners has expanded the stablecoin’s supply to over $2.6 billion, ranking 7th among all stablecoins and in the 7th place listed in this section for the past 6 months 2nd highest growth rate of any stablecoin.
FEI is a decentralized, dollar-pegged stablecoin issued by the Fei protocol. FEI is a fully asset-backed stablecoin, and users can mint new FEI by depositing various assets, which can be redeemed at a 1:1 ratio at any time.
FEI only accepts decentralized collateral, with ETH and LUSD making up the vast majority of its backing.
FEI helped popularize the concept of Protocol Controlled Value (PCV), as its reserve assets are managed by TRIBE token holders through decentralized governance (in the future through a hosted Balancer pool). This PCV is deployed into various DeFi protocols to earn yield, while the protocols themselves can mint FEI (POF) against excess reserves to provide liquidity to venues of their choice.
While FEI is “just” the 11th largest stablecoin with a market cap of $569 million, considering the combined value of PCV and POF, the protocol’s largest asset value is $878 million.
This, combined with the synergies from their merger with Rari Capital (the team behind permissionless money market protocol Fuse) to form the Tribe DAO, should give FEI the resources it needs to grow its market share.
OHM is a fully asset-backed free-floating currency issued by Olympus DAO. This means that OHM is not a stablecoin, but allows its price to be determined by the open market.
Olympus accumulates assets for its treasury and issues OHM using the bond and pledge mechanism. For the former, the protocol sells discounted OHM, exercisable within a few days, in exchange for various assets such as stablecoins or OHM-paired LP tokens; for the latter, OHM holders can stake their tokens for Access to newly issued OHM, which helps minimize bond dilution.
While these adjustments have had a significant impact on their price, the model pioneered by Olympus enables the protocol to have 99.2% of OHM liquidity and allows them to accumulate over $337 million worth of vault value.
Like Fei and FRAX, OHM holders can deploy these reserves to various DeFi protocols through governance decisions to generate revenue or for further strategic purposes.
The funding should also allow Olympus to continue to have a significant impact on the stablecoin industry, which in the long run should help propel its market cap past the current $368 million mark.
In the current cryptocurrency market, stablecoins have become an indispensable part. Although the original intention was to provide traders with an effective tool for risk management, the application of stablecoins has exceeded the design at the time. Before you want to step into the DeFi field and start investing, you may wish to spend more time to have a deeper understanding of this safe haven. I believe that stablecoins will definitely become an important part of your investment tools.
Exchange BitKeep for Stablecoins
1）Search for the stablecoin you want to exchange in [Quotes] of [Swap], and you can see its real-time price in your own currency list after collecting it. All stablecoins mentioned above, BitKeep wallet supports exchange;
2）Click [Swap] in the upper right corner to switch to the trading page, enter the trading pair to exchange the desired stablecoin on BitKeep.