Stablecoins
Stablecoins are a type of digital coin designed to maintain a stable valuer. To understand their importance, we first need to know what a regular cryptocurrency coin is.
A cryptocurrency coin, like Bitcoin or Ethereum, is digital money that exists online. It operates on a blockchain, which is a public, secure, and shared system that no single person or company controls. With cryptocurrency, you can send and receive money anytime, anywhere in the world, without needing a bank.
If you're curious about how blockchains work, checkout my Blockchain article.
Most cryptocurrency coins are very unstable. Their prices constantly change. One day your coin might be worth 100 dollars, and the next day it could drop to 70. This makes it difficult to use for saving money, paying someone, or building apps that need reliable pricing.
This is where stablecoins come in. They are designed to remain stable, so you can use them with confidence.
Types of Stablecoins
Fiat-Backed Stablecoins
Fiat-backed stablecoins are the most popular and easiest to understand. These are digital coins supported by real money, like US dollars or euros, held in a bank account. For every USDC or USDT in circulation, there should be one actual dollar held somewhere to back it up. Coins like USDT, USDC, TrueUSD, and even PayPal’s PYUSD fall into this category. People like them because they are stable, fast, and work almost anywhere in the crypto world. You can send them across the world in seconds, making them great for trading or payments. However, there is a catch. Since a company controls the coins and holds the money, they are centralized. This means your coins can be frozen or blocked if the company is asked to do so. While they are very useful, you still have to trust a business to manage the money behind the scenes.
Crypto-Backed Stablecoins
Crypto-backed stablecoins work differently. Instead of being supported by real money in a bank, these coins are backed by other cryptocurrencies like ETH. A well-known example is DAI, which is managed by a system called MakerDAO. To create DAI, you need to lock up more value in crypto than the amount you want to receive. For instance, if you want 100 DAI, you might need to lock up $150 worth of ETH. This approach helps protect against sudden price drops. The main benefit is that no company controls it. Everything operates through smart contracts and exists entirely on the blockchain. No one can freeze your funds, and no approval is needed for your transactions. It’s more complex and might seem harder to grasp, but if you value decentralization and control, crypto-backed stablecoins provide a more authentic blockchain experience.
Algorithmic or Hybrid Stablecoins
Algorithmic stablecoins operate in a more technical way. They aim to keep their value stable using smart contracts and code instead of being backed by money or crypto. When the price goes above or below one dollar, the system automatically adjusts the number of coins in circulation. Some of these coins are fully algorithmic, while others are partially backed by other assets. Frax is a good example of a hybrid stablecoin that uses both code and reserves. The goal of these coins is to create a completely decentralized stablecoin without the need for banks or companies. However, it's risky. One of the most well-known algorithmic coins, Terra’s UST, collapsed and caused significant losses for investors. Today, developers are working on smarter and safer versions, like GHO from the Aave protocol, but this area is still experimental.
Commodity-Backed Stablecoins
Commodity-backed stablecoins are linked to real-world physical items, like gold. Instead of backing coins with dollars or ETH, companies back them with gold stored in secure vaults. One coin represents a small amount of real gold. For example, PAXG and XAUT are both backed by actual gold, and some even allow you to redeem your coins for physical gold if you wish. These coins are ideal if you want the stability of gold along with the speed and flexibility of crypto. They offer the best of both worlds, gold and blockchain. However, keep in mind that, like fiat-backed coins, they are controlled by companies. You still need to trust that they truly have the gold and will allow you to access it.
Where to Buy and Use Stablecoins
Buying stablecoins is actually easier than it sounds. You don’t need to be a tech expert or a blockchain developer. Most people start by buying stablecoins on crypto exchanges. Platforms like Binance, Coinbase let you purchase coins like USDT, USDC, or DAI using your local currency. Once you have your stablecoins, you can either keep them on the exchange or move them to a self-custodial wallet like Ledger. If you leave your coins on the exchange, they technically belong to the platform. If that platform ever goes bankrupt or gets hacked, your funds could be at risk. But if you move them to a wallet like Ledger, you fully own and control your coins. Even if Binance disappears, your coins on Ledger are safe, as long as you keep your recovery phrase secure. That’s the power of self-custody.
What Are Stablecoins Used For?
Stablecoins might seem boring because they don’t move much, but that’s exactly why they’re useful. People use them for:
1. Avoiding crypto price swings
When Bitcoin or Ethereum gets too volatile, people move their money into stablecoins like USDT or USDC to protect their value.
2. Sending money across the world
You can send stablecoins to anyone, anywhere, in just minutes. It’s faster and cheaper than banks or PayPal.
3. Protecting savings
In countries with inflation or unstable currencies, people use stablecoins to keep their money safe. It’s like holding digital dollars.
4. Earning passive income
You can lend or stake stablecoins in DeFi apps to earn interest. It’s a safer way to grow your crypto without dealing with price drops.
5. Trading and buying crypto
Most exchanges use stablecoins as the base currency. You often need USDT or USDC to buy other tokens.
6. Moving between crypto and cash
Stablecoins make it easier to go from your local money into crypto, and back again when you’re ready to cash out.
7. Paying for stuff
Some websites and apps accept stablecoins for payment. It works like using PayPal but without needing a bank.
Well-known stablecoins
Fiat-Backed Stablecoins
Fully collateralized by real fiat currencies held in bank accounts. Stable but centralized.
USDT (Tether): Most widely used, centralized stablecoin pegged to USD.
USDC (USD Coin): Known for transparency and regular audits; backed by Circle and Coinbase.
TUSD (TrueUSD): Provides third-party attestations for reserves; by TrustToken.
BUSD (Binance USD): Was popular for trading before Binance discontinued it; issued with Paxos.
PYUSD (PayPal USD): Designed for payments within the PayPal ecosystem.
Crypto-Backed Stablecoins
Overcollateralized by cryptocurrencies like ETH to protect against volatility; fully decentralized.
DAI (MakerDAO): Backed by ETH and other crypto assets; governed by a DAO.
GHO (Aave): New DeFi stablecoin created by the Aave protocol.
Algorithmic or Hybrid Stablecoins
Use smart contracts to maintain price stability, sometimes with partial backing.
- FRAX (Frax Protocol): Combines algorithmic supply control with partial crypto reserves.
Commodity-Backed Stablecoins
Backed by physical assets like gold, offering stability tied to commodity prices.
XAUT (Tether Gold): Each coin represents a specific amount of real gold.
PAXG (Paxos Gold): Redeemable for actual gold.
The Next Step for Stablecoins
Stablecoins are evolving quickly, and Tether’s latest update is a big deal. They just launched USDT1 on a new blockchain called Plasma. This aims to make stablecoin transactions faster, cheaper, and more secure by using Bitcoin’s network for protection.
Tether created USDT1 to fix problems like high fees and slow speeds on blockchains such as Ethereum. Plasma lets users send USDT almost instantly with zero fees, making stablecoins more practical for everyday use and global transfers.
Technically, Plasma’s consensus is anchored to Bitcoin, which means it uses Bitcoin’s strong security without the high costs or slow processing of other chains. This also helps Tether keep decentralization while improving scalability.
For Tether, USDT1 helps expand stablecoin adoption by making it easier and cheaper to use for micropayments, remittances, and DeFi. Plus, it works well with existing Ethereum smart contracts, so developers can easily add it to their apps.
In short, USDT1 on Plasma fixes key issues in stablecoin use by combining Bitcoin’s security with fast, low-cost transactions and cross-chain compatibility. This update keeps Tether competitive as crypto grows and changes.
Conclusion
Stablecoins play a crucial role in making cryptocurrencies practical and accessible for everyday use. They solve the problem of price instability that holds back many crypto projects. Whether backed by dollars, crypto, gold, or algorithms, each type of stablecoin offers different benefits and trade-offs. New innovations like Tether’s USDT1 on the Plasma blockchain show how the space is continuously evolving to become faster, cheaper, and more secure. As stablecoins improve, they will open more doors for global payments, DeFi, and digital finance in general.
