Stablecoin
A stablecoin is a cryptoasset whose price is pegged to another asset (most commonly a currency like the US dollar) Stablecoins have gained great popularity among DeFi users, since they allow to use DeFi without being exposed to volatile cryptocurrencies. They also allow exposure to real world assets like stocks or commodities in a permissionless and decentralized manner.
Basics
The most important feature of a stablecoin is its peg. A stablecoin is said to be pegged to another asset when its price trades closely to such asset. A stablecoin can suffer a depeg which can be both temporary or permanent. A temporary depeg can happen when liquidity is particularly low or when market volatility spikes; in both cases temporary depeg can cause a liquidation cascade and deviate the price from the peg even more. A permanent depeg marks the failure of the stablecoin and it mostly happens with algorithmic stablecoins.
Types of stablecoins
Currency-pegged
Most stablecoins in circulation are pegged to a currency. By far the most common currency is the US dollar, other currencies used ensure the peg are the Euro, the British Pound, the Australian Dollar and the Korean Yuan.
Commodity-pegged
Stablecoins like PAXG or XAUT are pegged to the gold price.
Stocks and other assets
Protocols like Synthetix or Mirror offer synthetic exposure to assets like stocks through stablecoins pegged to those assets. Their peg is mainteined by an Oracle which fetches prices from outside the blockchain
How stablecoins keep their peg
There are multiple ways used by stablecoin issuers to make sure the peg is mainteined, here are outlined the main ones:
Fully backed stablecoins
These are the most common and the most liquid ones. Stablecoins like USDT, USDC, USDP or BUSD are issued by a centralized entity which ensures to back each unit of the coin with one unit of the underlying asset (in this case 1 US dollar). It is common for these entities to keep bonds and sometimes other assets in the stablecoin reserve.
Overcollateralized stablecoins
These stablecoins keep their peg thanks to a redeeming mechanism. Usually the issuer is a decentralized money market (like MakerDAO or Abracadabra) which allows users to deposit assets as collateral and borrow the stablecoin against it. Since the LTV (Loan-to-value) is always kept above 100%, it is always possible to redeem one unit of the stablecoin for one dollar worth of collateral. This is one of the safest way to create a decentralized stablecoin since the depeg risk is greately mitigated by overcollateralization. The biggest overcollateralized decentralized stablecoin is currenlty DAI, pegged to the USD.
Algorithmic stablecoins
Algorithmic stablecoins (or Algo stablecoins) are increasingly becoming more popular although they are riskier than the ones discussed above. These coins keep their peg through different kinds of systems which do not ensure a backing, but only operate on the liquidity market, handling supply and demand dinamically to reach a stable price. One commonly used model is to issue two tokens: one to be pegged, the true stablecoin, and the other to be used to handle market volatility. The peg is then mainteined trough arbitrage: the protocol lets users exchange the stablecoin for the other token at a stable rate. For example the UST stablecoin issued on the Terra blockchain is always redeemable for 1 USD worth of LUNA tokens and LUNA is burnable to mint an amount of UST equal to the USD worth of LUNA burned. Since the peg is mainteined through arbitrage and not through backing these stablecoins are more volatile and more subject to depeg events than other types described above. Several DeFi protocols have issued their algorithmic stablecoin and many have failed (see the Iron Finance crash[1] for example) and many are still used today (like UST or USDN).
See More
- Stablecoin Printer is a Telegram Bot that sends alerts when top stables are printing. You can find them on twitter @usdcoinprinter
- 0xngmi had a good Twitter thread on Stablecoins you can read here
- Defillama´s stablecoin dashboard - Per-chain breakdowns of stablecoin dominance for 53 chains. Counts the stablecoins bridged through multiple bridges and the ones issued on the chain (eg: USDC.e, USDC, multichain USDC...)