Blockchain Weekly Report: Micro-Strategy, Solana Ecosystem and Ethereum Price Rise

summary： Stablecoins: An Essential Crypto AssetStablecoins are a vital type of cryptocurrency in th...

Blockchain Weekly Report: Micro-Strategy, Solana Ecosystem and Ethereum Price Rise

Stablecoins: An Essential Crypto Asset

Stablecoins are a vital type of cryptocurrency in the market, combining the characteristics of both fiat currencies and cryptocurrencies. Their introduction has significantly transformed the use cases of cryptocurrencies, and they are widely applied in trading, storage, and investment. Among the top ten cryptocurrencies by market capitalization, stablecoins rank in the top three, highlighting their important role in the entire crypto market. So, what is a stablecoin? What functions does it serve, and what risks are associated with it? Below, we will introduce the basic concepts, classifications, uses, and risks of stablecoins in detail to help you better understand this financial tool.

What is a Stablecoin?

A stablecoin is a type of cryptocurrency pegged to fiat currencies, commodities, or other assets. Its primary characteristic is its lower volatility and stable price, making it a bridge between traditional financial markets and the crypto world. Compared to traditional cryptocurrencies like Bitcoin (BTC) or Ethereum (ETH), stablecoins have much lower price fluctuations, mainly relying on reserves of the fiat currency or asset they are pegged to.

Due to the extreme volatility of cryptocurrency markets, traditional crypto assets are not well-suited for everyday transactions or savings. Furthermore, the conversion process between fiat and crypto is often cumbersome and incurs high fees. This is where stablecoins come into play, addressing these market demands.

Currently, the most famous stablecoins are "USD stablecoins" pegged to the US dollar, such as USDT (Tether), USDC, and DAI. These stablecoins are essentially pegged to the US dollar at a 1:1 rate, earning them the nickname "U coins."

Functions and Uses of Stablecoins

Stablecoins act as a bridge connecting traditional finance and crypto markets and play multiple roles in the financial field. They serve not only as a trading tool but also as a savings instrument and are increasingly adopted across various global scenarios.

1. Cryptocurrency Valuation Unit

In the early days of the cryptocurrency market, users commonly measured other crypto assets’ values using Bitcoin (BTC) or Ethereum (ETH). This approach was not very intuitive for the general public. With the introduction of USD stablecoins, investors began to use the US dollar as a valuation unit, simplifying and making transactions more straightforward.

2. Digital Savings Tool

There are many types of stablecoins. Aside from those pegged to fiat currencies, there are stablecoins pegged to real-world commodities such as gold, oil, and silver. These stablecoins also serve as asset storage options. Compared to physical assets, digital storage offers advantages in ease of storage, transfer, and use.

3. Everyday Payment Tool

As the crypto market continues to evolve, an increasing number of businesses are starting to accept stablecoins as payment methods. For example, in Lucerne, Switzerland, McDonald's outlets have begun accepting USDT and Bitcoin as payment options. Additionally, many companies use USDT to pay employee salaries.

Classifications of Stablecoins

Stablecoins can be divided into four main categories based on their pegging mechanisms:

1. Fiat-Collateralized Stablecoins

Fiat-collateralized stablecoins are the most common type of stablecoin, usually pegged to a fiat currency such as the US dollar or euro. They are managed by centralized institutions, and their reserves are typically backed by fiat currency reserves or bonds. Third-party audits are conducted periodically to ensure their stability.

• USDT (Tether): The most widely used fiat stablecoin with the highest market capitalization. For every USDT issued, $1 in cash or bonds must be reserved.

• USDC: Issued by Coinbase and Circle, it is one of the few fiat stablecoins regulated by the US, offering higher security.

• PYUSD: Introduced by PayPal in 2023, PYUSD has garnered attention as a stablecoin pegged to the US dollar.

• BUSD: A fiat stablecoin created by Binance and Paxos, regulated by US financial institutions.

2. Crypto-Collateralized Stablecoins

These stablecoins are backed by cryptocurrency reserves rather than fiat money. They often use an over-collateralization mechanism, where more crypto is pledged than the value of stablecoins issued, ensuring their stability.

• DAI: Developed by MakerDAO, DAI is a decentralized stablecoin based on Ethereum’s smart contracts and crypto reserves.

3. Algorithmic Stablecoins

Also known as "algorithmic stabilization," these stablecoins use smart contracts and market mechanisms to regulate supply, maintaining a pegged exchange rate without the need for collateral reserves.

• USDD: An algorithmic stablecoin based on the TRON blockchain and supported by TRON DAO Reserve's smart contract system.

• UST: Previously popular, UST was developed by the Terra blockchain and maintained stability through market mechanisms linked to its native token, Luna.

4. Commodity-Collateralized Stablecoins

These stablecoins are backed by actual commodities such as gold, silver, or oil, providing investment and storage functionalities.

• XAUT: Issued by Tether, XAUT represents the value of physical gold.

• PAXG: Developed by Paxos, each PAXG token is equivalent to 1/400th of a standard London Good Delivery gold bar.

Risks Associated with Stablecoins

Although stablecoins offer numerous advantages, they also come with certain market risks. Below are the most common risks related to stablecoins:

1. Risk of Insufficient Reserves

If fiat-collateralized stablecoins like USDT or USDC lack sufficient reserves, it could lead to market loss of confidence and investor panic.

2. Decoupling Risk

Stablecoins might lose their peg to fiat currencies during market volatility or poor institutional management.

3. Policy Risk

Some countries or regions impose strict regulations on stablecoins. For example, the US Securities and Exchange Commission (SEC) penalized BUSD, introducing regulatory uncertainty for many stablecoins.

4. Centralization Risk

The issuing and management organizations behind many stablecoins are highly centralized. This centralization could lead to restrictions such as freezing user wallets or imposing regulations.

5. Transaction Fees

When purchasing stablecoins using credit cards, fees are usually applied, which may impact the effective purchase price.

Conclusion

Stablecoins offer great opportunities and usability across various financial scenarios but also involve market risks. Investors should maintain a clear understanding of these risks and proceed cautiously when using stablecoins.

Tags: Stablecoin, Cryptocurrency, USDT, USDC, Stablecoin Risks