June 14, 2024

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USDC


4.5

The USD Coin was developed by the Centre consortium founded by Circle, a peer-to-peer payments company based in Boston, Massachusetts.

Read our review

Binance USD


4.0

BUSD is a fully-regulated stablecoin backed by U.S. dollars, issued via the Paxos Trust Company.

Read our review

USDP


3.9

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Read our review

DAI


3.5

Dai is an Ethereum-based stablecoin managed by MakerDAO and developed by the Maker Foundation.

Read our review

Stablecoins explained: In simple terms, a stablecoin is a digital currency that retains its value because it’s backed by the value of an underlying asset, which can be anything from fiat currency to oil and gold, or sometimes even cryptocurrency.

For example, Tether (USDT) and USD Coin (USDC) are stablecoins backed by US dollars held in reserve. PAX Gold (PAXG), on the other hand, relies on a gold reserve to maintain a steady price.

In the 21st century, stablecoins are considered to be one of the major financial breakthroughs of the era:

  • Stablecoins are great for traders or investors who need to “hold value” in a digital asset without the volatile price swings of cryptocurrency.
  • Stablecoins offer new ways of earning interest (a.k.a. “yield”) at a time when traditional savings vehicles offer next to nothing. (See our page on Best Interest Rates.)
  • Stablecoins also offer a cheap, fast, and accessible means of transacting value across borders.

In this piece, we’ll cover our list of best stablecoins, then explain more about how smart investors can use stablecoins to build wealth.

Name Code Year Founded Number of Social Followers Stabilized Asset BMJ Rating
USD Coin USDC 2018 96,400 US Dollar 4.5
Binance USD BUSD 2019 9,400,000 US Dollar 4.0
Pax Dollar USDP 2016 33,300 US Dollar 3.9
Dai DAI 2017 229,900 US Dollar 3.5
Tether USDT 2015 290,600 US Dollar 3.5
Digix Gold Token DGX 2016 17,400 Gold N/A
Gemini Dollar GUSD 2018 441,000 US Dollar N/A
Huobi USD HUSD 2020 1,200,000 US Dollar N/A
Pax Gold PAXG 2019 33,300 Gold N/A
Stably USD USDS 2019 7,465 US Dollar N/A
TrueUSD TUSD 2018 49,200 US Dollar N/A

Top Stablecoins by Size

To give you a visual of how the stablecoins stack up against each other, here’s a look at the top four by market capitalization (or total amount held by investors):

top four by market capitalization
Source: Glassnode

Types of Stablecoins

Just as the government backs fiat currency, so too are stablecoins backed by some other asset or authority. Here are the types of stablecoins, and how they’re backed.

Fiat-Backed Stablecoins

Fiat-backed stablecoins are associated with a particular fiat currency: US dollars, Euros, etc. Fiat-backed stablecoins offer better stability, especially compared to crypto-backed stablecoins. While cryptocurrencies come with wild price fluctuations, fiat-backed stablecoins come with minimal price fluctuations, as there’s a trusted currency behind them.

However, fiat-backed stablecoins are relatively new and come with a limited track record, so they’re not without risk.

Coinbase, one of the world’s largest cryptocurrency exchange platforms, offers a fiat-backed stablecoin called USD Coin. This coin can be exchanged on a 1:1 ratio with the US dollar. It is generally safe to use, as every USDC is backed by one US dollar.

Crypto-Backed Stablecoins

As the name suggests, these are stablecoins “backed” by other crypto assets. Because cryptocurrency prices can be volatile, crypto-backed stablecoins are overcollateralized (meaning they keep extra crypto in reserves, in case of a market crash).

For example, to borrow $5 of a crypto-backed stablecoin, you may need to “put in” (or lock up) $10 of another crypto asset as collateral. If the underlying crypto asset loses its value, you still have a built-in cushion of $5. In general, this volatility makes crypto-backed stablecoins less reliable than fiat-backed stablecoins.

Commodity-Backed Stablecoin

These stablecoins maintain their value through precious metals or other commodities such as real estate or oil. While these stablecoins are generally centralized, the centralization protects users from crypto volatility. Gold is the most popular commodity to be collateralized. Paxos Gold, Tether Gold, and Digix are three of the most liquid gold-backed stablecoins.

Commodity-backed stablecoins allow you to invest in assets that may otherwise be out of reach. For example, obtaining and storing a gold bar can be complex and expensive, so holding a “gold stablecoin” is an easier way to store value without having to buy the underlying commodity.

Algorithmic Stablecoin

Algorithmic-backed stablecoins rely on specialized algorithms and smart contracts to manage the supply of tokens in circulation. For example, if the price of an algorithmic stablecoin is set at $1, but the stablecoin price rises higher, the computer algorithm will automatically release more tokens into the supply to bring down the price.

Alternatively, an algorithmic stablecoin will reduce the number of tokens in circulation when the market price drops below the price of the fiat currency it tracks. Terra was a popular algorithmic stablecoin that lost its peg to the US Dollar in May 2022 when the crypto market crashed.

The dramatic collapse of Terra exposed the inherent fragility of algorithmic stablecoins due to their dependence on market conditions which can often become highly volatile. Commodity and fiat-backed stablecoins are more resistant to this kind of panic behavior.

What is Backing Each Stablecoin on the List?

Let’s take a closer look at the fundamentals and the teams behind each of the stablecoins on our shortlist:


usdcWhat is backing USDC?

The USD Coin was developed by the Centre consortium founded by Circle, a peer-to-peer payments company based in Boston, Massachusetts. Apart from Circle, the consortium also includes members from the crypto exchange Coinbase and the bitcoin mining company Bitmain.

USDC is the backbone of Circle’s global payments service. The company has been valued at $9 billion as of 2022.

USDC is not mined – a new coin is created whenever someone buys or acquires USDC via currency conversion. When this happens, it is matched by an equal amount of US dollars deposited in independent currency reserves, either as cash or in the form of short-term US treasuries.

Each USDC token has a corresponding $1 U.S, either as cash or cash equivalent invested in an owned account. Decentralization will be ensured by allowing numerous different projects to join a network of USDC issuers overseen by the Circle project, each of which maintains its own cash reserves to stabilize the tokens it issues.

While the oversight of Circle can insure against value fluctuation, allowing third parties to independently issue the USDC does invite potential concerns of individual error or bad actors. Still, USDC has gained the trust of investors due to Circle’s commitment to transparency, compliance with US regulations, and partnership with leading US financial institutions.


TetherWhat is backing USDT?

Tether holds the distinction of being one of the earliest stablecoins. It was launched by a company called Tether Limited Inc in 2014 – 15. Tether is owned by a Hong Kong-based company called iFinex Inc, which also owns Bitfinex, one of the largest crypto exchanges in the world.

The link between Bitfinex and Tether was only revealed during the Paradise Papers financial data leak. Since then, there have been numerous controversies surrounding Tether’s ownership and management, with allegations of market manipulation and false advertising.

On paper, Tether is pegged to the US Dollar in a 1:1 ratio, with cash and cash equivalent reserves fully collateralized. US authorities have questioned the validity of these claims, stating that at times the company does not hold enough cash/cash equivalent dollar reserves.

Recent filings indicate that Tether’s collateral includes a low percentage of cash reserves (around 7%), with the rest being cash equivalents, secured loans, corporate bonds, and other investments.

Due to controversies and a general lack of transparency, Tether has been losing ground to other stablecoins like the USDC. However, the token has so far maintained a stable 1:1 peg with the US dollar.


PaxosWhat is backing USDP?

Pax Dollar, previously known as Paxos Standard or PAX, is a stablecoin launched by Paxos Trust Company. Based in New York, Paxos is a fintech company specializing in blockchain services including cryptocurrency brokerage, asset tokenization, and asset settlement.

The team backing Paxos is a mixed bag with a wealth of expertise from tech and finance backgrounds. The stablecoin itself is asset-backed, with reserves of US Dollars held in a 1:1 ratio. Like the USDC, Paxos claims that USDP is fully reserved with cash and cash equivalents.

The stablecoin operates in full compliance with the New York state financial service laws. The reserves are validated by independent monthly audits. It is a relatively low-risk stablecoin, although overshadowed by bigger alternatives like the USDC and Binance USD.


tusdWhat is backing TUSD?

True USD is another dollar-backed stablecoin with collateral held in a 1:1 ratio. Launched in 2018, the crypto resides on TrustToken, a platform designed to create various asset-backed tokens. TUSD is one of the several cryptos launched by the TrustToken team.

The young team behind this project boasts some of the most impressive technology names in the field, albeit with limited financial experience. The company has its headquarters in San Francisco, California.

True USD reserves are held in an escrow account by third parties. Qualifying institutions can participate in the True USD system, eliminating the need for trust in a central project (albeit replacing that with the need for trust in third-party accounting). With only two minor deviations, the price has remained stable within +/- $0.02.


What is backing DAI?

Dai is an Ethereum-based stablecoin managed by MakerDAO and developed by the Maker Foundation. The team was created by founder Rune Christensen in 2014 as a decentralized autonomous organization or DAO.

MakerDAO membership is limited to owners of the MKR – the project’s governance token. Members vote to decide the parameters and future roadmap of the DAI stablecoin. Unlike other asset-backed stablecoins, Dai is not pegged to US dollars or gold.

But it still aims to keep its value pegged at 1:1 to the US dollar, through a system of Ethereum smart contracts. To create Dai tokens users have to purchase and stake an equal value (in U.S. Dollars) of Ethereum tokens.

As the price of Dai rises, users will be incentivized to create more. As the price falls, users will be incentivized to sell their assets back to the pool. Volatility in Ethereum severely affected Dai’s stability in 2020.

As a result, MakerDAO has shifted much of its reserves to USD Coin, one of the most popular stablecoins in terms of market cap. Each Dai token is backed by a mix of 62% USDC and 29% ETH. Despite some minor issues, Dai is an excellent example of the creative utilization of smart contracts.


geminiWhat is backing GUSD?

Gemini USD is a stablecoin launched by the Gemini Trust Company, a cryptocurrency exchange based in New York City. Gemini was founded by Tyler and Cameron Winklevoss, well-known Bitcoin billionaires and tech entrepreneurs.

With a total valuation of $7 billion and employing over 1000 people, Gemini is one of the largest regulated cryptocurrencies in the world. Consequently, the team behind GUSD is also highly experienced and professional.

GUSD is backed 1:1 by real dollars in reserve, with monthly audits conducted by reputed accounting firms. One of the first stablecoins to get regulatory approval in the US, Gemini USD is generally well-regarded for its transparency and reliability.


digixWhat is backing DGX?

Digix Gold Token is a commodity-based stablecoin launched by DigixGlobal. Founded in 2014 Digix is based in Singapore and has a team with extensive experience in both finance and blockchain development at some of the world’s largest firms.

The stablecoin takes the idea of a blockchain gold standard literally, promising that each DGX token represents 1 gram of actual, solid gold in a vault in Singapore. The utility of this over purchasing gold outright or an options contract remains uncertain, but the mechanism is sound.

A Digix token is minted once the underlying Proof of Provenance protocol confirms that a corresponding ounce of gold is in the vault. Apart from DGX, the company also has a governance token called DigixDAO.


Binance logoWhat is backing BUSD?

Developed by Binance, one of the largest cryptocurrency exchanges in the world, BUSD is a fully-regulated stablecoin backed by U.S. dollars, issued via the Paxos Trust Company. Both Binance and Paxos have a wealth of industry-leading expertise.

Each BUSD is backed 1:1 by a reserve of dollars held by Paxos in a secure account. BUSD is fully backed by reserves of either cash or cash equivalents in the form of short-term US treasuries, much like the USD Coin. The entire system is fully compliant with the New York State financial regulations.

In September 2022, Binance announced that it will shut out other stablecoins on the exchange and convert those holdings into BUSD. The move has the potential to increase the market cap of BUSD and improve its already excellent price stability.


husdWhat is backing HUSD?

Huobi is one the Asia’s largest cryptocurrency exchanges, founded in China and now operating out of Seychelles with offices in Singapore, Hong Kong, Japan, and the US. The HUSD is a stablecoin launched by Huobi through a startup called Stable Universal.

The firm issued the HUSD stablecoin token as a means to uncouple for pre-existing 3rd party stablecoins, as well as gain exposure in DeFi markets and platforms. Launched in 2018, HUSD replaced PAX, USDC, GUSD, and TUSD on the Huobi platform. It is pegged to the dollar in a 1:1 ratio.

Much like BUSD, Huobi’s stablecoin relies on Paxos as a custody partner. Every HUSD token is backed by U.S. dollars held by Paxos in the form of cash reserves in money market accounts in the United States. Unlike other major stablecoins, HUSD does not rely on cash equivalents.


paxgoldWhat is backing PAXG?

PAX Gold is an Ethereum-based digital asset backed by gold reserves. As the name suggests, it is issued by Paxos, a name that is associated with multiple stablecoins on this list either as the main team or as a custody partner.

As per the Paxos website, each token is backed by one fine troy ounce (t oz) of a gold bar. In this case, if you own PAXG, you also own the gold that backs it. Due to the reputation of Paxos, PAXG is generally considered to be a safe and reliable gold-based stablecoin.


stablyWhat is backing USDS?

Stably USD is a cryptocurrency pegged to the U.S. dollar, with each token set to $1. The company behind it is a VC-backed Fintech startup based in Seattle. Stably has a team with experience in both technology and finance.

While they have little background in blockchain, their c-level leadership has worked with impressive firms in this space. The company relies on Prime Trust LLC, a Nevada-based financial institution to act as a regulated trustee of dollar reserves.

The company maintains an all-cash reserve that matches the total valuation of all USDS tokens in an escrow account. Monthly audit reports are available to inspire investor confidence. Due to this transparency and compliance, USDS can be considered a low-risk option.


Why Do We Need Stablecoins?

Here are some of the primary use cases:

  • Safe Haven Asset: Unlike cryptocurrencies that fluctuate dramatically in price, those who use stablecoins to store value have minimal risk of loss.
  • Payments: Businesses can benefit from accepting stablecoins as payment, allowing them to reduce transaction fees that come with typical payment processors.
  • Instant Settlements: When settlements are paid out, they often can’t be immediately delivered because they’re subject to regular banking hours. Stablecoins operate on blockchain, meaning they run 24/7: parties can receive settlement immediately.
  • Lending: Stablecoin lending is a high-yield opportunity for crypto investors, as it can offer double-digit interest.
  • Escrow: Stablecoins automate the escrow process through smart contracts that evaluate escrow conditions without the use of institutional intermediation.
  • Alternative Banking: 14.1 million American adults are unbanked. All you need is internet access to have a stablecoin “account,” opening financial access to all.

How Do You Make Money with Stablecoins?

Most people make their money with regular cryptocurrency through trading, mining, staking, lending, or yield farming. Because stablecoins are tied to an asset, making money with stablecoin works a little differently.  Here are the ways to make money with stablecoins:

  • Staking: Staking involves helping maintain the flow of the blockchain network on a particular asset. In return, you earn compensation from income from the network. Essentially, you’re locking in your stablecoins to receive rewards. Examples of stablecoins that offer staking rewards include Binance, Tether, and PAX Gold. (See our guide to Best Crypto Staking Yields.)
  • Lending: You can lend your stablecoins out to borrowers to earn money, with rates of return ranging from 5 to 12 percent. You can lend your stablecoin on many major crypto lending platforms, such as BlockFi or Celsius. (See our guide to Top Crypto Lending Platforms.)
  • Yield Farming: Yield farming allows investors to earn money by lending stablecoins through smart contracts, like earning interest on a traditional savings account. (See our guide to Best Yield Farming Rates.)

How Price-Stable Are Stablecoins?

When looking at the prices of stablecoins on digital asset platforms, you will notice that stablecoins often do not remain “stable” at $1.00. For example, at the time of writing this article, the Gemini Dollar (GUSD), Huobi USD (HUSD), and Stably USD (USDS) were trading at $0.993, $0.996, and $0.9995, respectively.

The reason is that the issuers of dollar-collateralized stablecoins need to manage the supply of their coins through issuing and burning/redeeming to ensure the value of their coins stays roughly on par with the US dollar.

However, there have also been several stablecoins that have lost their peg entirely. Among fiat-backed stablecoins, Steem Dollars (SBD) is a notable example. Part of the Steemit network, SBD was designed to maintain its value at one dollar.

The startup behind the Steemit network eventually stopped managing the coin’s money supply and let the digital currency float freely. This caused the coin’s value to surge to $15 during the 2017 rally before it came crashing down as low as $0.51.

But the most catastrophic example of a stablecoin losing its peg has to be the story of Terra. An algorithmic stablecoin launched in 2018, Terra was a very popular project helmed by a capable team of experts and backed by major investors like HashKey Digital Asset Group and Huobi Capital.

Terra (UST) was tied to its governance token LUNA, and the system relied on a combination of investor demand, pricing data, and market volatility to maintain a 1:1 peg to the US dollar. The values of UST and LUNA were interlinked in this system.

Terra was also linked to a lending platform called Anchor, which promised 20% yields to anyone who staked UST on their platform. This created an influx of users to the Terra blockchain, and the price of LUNA reached an all-time peak of $120 as the demand for UST increased.

During the crypto market crash in May 2022, short selling by wealthy investment firms triggered panic selling by other investors as UST lost its peg to the dollar. This bank run created a “death spiral,” collapsing the value of both UST and LUNA in a matter of days.

The event wiped out nearly $60 billion from Terra investors, dealt a severe blow to the entire crypto market, and raised serious questions about the stability of stablecoins. Many experts cited this as a lesson about the glaring weaknesses in the whole concept of “algorithmic stablecoins.”

It must be noted that fiat and gold-backed stablecoins are far more resistant to such volatility. However, even these stablecoins are not 100 percent price-stable. Moreover, due to their centralized nature and occasional lack of transparency, even fully-collateralized stablecoins carry some risk.

Investor Takeaway

For a currency to work, it has to reliably store value. Savers need to feel confident that the amount of money they put in the bank on Monday will reasonably reflect their wealth on Friday. Both inflation and deflation need to stay under control.

That is why several digital currency projects have taken a new approach. Instead of replacing traditional money, they’ll work alongside it. “Stable cryptocurrencies” peg themselves to a fiat currency, typically the dollar, and automatically adjust the number of tokens in circulation to keep the price stable.

 

Always do your research and never invest more than you are willing to lose. And consider subscribing to Bitcoin Market Journal to help you become a smart crypto investor.

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