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Top 5 Stablecoins and the Differences Between Them
Cryptocurrency
Published on: Mar 27, 2023Updated on: Nov 14, 2023
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In Brief
Stablecoins are cryptocurrencies whose values are tied (or pegged) to a commodity or a fiat currency to provide a price-stabe digital currency. Read the article to understand the differences of top 5 coins.
Introduction
Stablecoins are cryptocurrencies whose values are tied (or pegged) to a commodity or a fiat currency to provide a price-stabe digital currency.
They were created to solve the price volatility issue that’s common with cryptocurrencies such as Bitcoin (BTC), making stablecoins an important part of the crypto industry, as they enable users to make payments without having to worry about market volatility and allow holders to store value in a stable asset, such as the US dollar or gold.
Additionally, stablecoins act as trading capital for traders looking to cash out from volatile crypto assets but continue to hold their funds in crypto, thus alleviating the need for a financial intermediary, such as a bank, to hold the funds.
Stablecoins have also emerged as the base currency of popular trading pairs, such as USDT/BTC or USDT/ETH, as they enable anyone from across the globe to access liquidity without the need for a fiat currency payment provider.
Similar to other cryptocurrencies, you can store, send, receive, and swap stablecoins using your crypto wallet, such as Trust Wallet. Trust Wallet is an easy-to-use, truly multi-chain and self-custody wallet that makes it easy for its 60+ million users to securely store and manage over 9 million crypto assets, NFTs included, across 70 blockchains.
Top 5 Stablecoins
There are currently four types of stablecoins: algorithmic, commodity-backed, crypto-collateralized, and fiat-backed. Each type of stablecoin is designed to fix the value of the stablecoin to the price of a stable asset, typically the US dollar.
Below is a list of the top five stablecoins we have identified that each have their own unique characteristics and all are supported by Trust Wallet.
USDT (Tether)
USDC (USD Coin)
BUSD (Binance USD)
DAI
PAX (Paxos Standard)
USDT (Tether)
What is Tether USD?
Tether USD (USDT) is the market-leading stablecoin in the crypto sector by market capitalization. USDT is not only popular, but it’s also broadly used by traders with its value being pegged 1:1 to the US dollar. This means that for every USDT that exists, there is an equivalent one US dollar that’s held in Tether Limited’s reserve. Therefore, the USDT remains unaffected by the price volatility that is common with other cryptocurrencies.
How Does Tether USD Work?
Although Tether has several fiat-anchored stablecoins, even one tied to gold (AUXT), USDT is the most popular among them with a circulating supply of over 70 billion tokens, according to data on CoinMarketCap.
Unlike cryptocurrencies such as BTC that are mined, USDT isn’t mined nor is it decentralized. Instead, it’s a centralized token that is issued and removed from circulation through a process known as ‘burning’ to balance the supply of tokens to user demand. The buying and selling of USDT against other cryptocurrencies, however, does not affect the circulation.
Tether doesn’t have its own blockchain. Instead, it offers tokens on blockchains such as Algorand, Avalanche, Ethereum, Polygon, Solana, and Tron.
Pros & Cons of USDT
Pros
Stable and reliable because it is pegged to the US dollar
Highest market capitalization, thus high liquidity
Widely accepted and used by most crypto traders
Backed by fiat reserves
Cons
USDT cannot be mined
It’s not decentralized
What Makes USDT Unique?
Tether USD is unique because it is neither decentralized nor mined. Instead, the company behind it, Tether, controls the issuance and circulation of USDT. It’s also backed by assets in the company to ensure it retains its 1:1 ratio to the US dollar. In addition, for accountability and transparency purposes, Tether publishes a quarterly financial attestation of the assets in its reserves on its website.
USDC (USD Coin)
What is USD Coin?
USD Coin (USDC) is a tokenized US dollar, fully backed by US dollar assets. Despite the name, the second-largest stablecoin by market capitalization is not backed or issued by the US government. Instead, CENTRE, the issuer of USDC led by Coinbase and Circle, holds its USD Coin reserve in segregated accounts within financial institutions the US government regulates. In addition, the segregated accounts are audited by Grant Thornton, an independent assurance, tax, and advisory firm, which provides USDC’s monthly attestation reports.
How Does USD Coin Work?
USDC was developed to provide customers - both businesses and individuals alike - with a cost-effective and fast way of transferring funds worldwide. The main goal behind its creation was to make the crypto industry more user-friendly. As the second-largest stablecoin by market capitalization, USDC has a circulating supply of over 42 billion coins.
But how does USDC maintain its 1:1 anchor to the US dollar?
If a user tokenizes a US dollar to receive USDC, the dollar backing up the stablecoin will be held by the issuing entity to ensure 1:1 dollar asset backing for USDC. When a holder wants to redeem US dollars, they can burn their USDC and receive US dollars back in return. As a result, USDC manages to have one of the most robust dollar pegs in the stablecoin market. The trading of USDC against other cryptocurrencies, however, does not affect the circulation.
USD Coin is compatible with multiple blockchains like Algorand, Ethereum, Solana, Stellar, and TRON, among others.
Pros & Cons of USDC
Pros
Fully backed by US reserve assets that are US-regulated
Very stable price peg
High market cap and liquidity
Cons
USDC cannot be mined
It’s not decentralized
Wallet address blacklisting is possible and has been done
What Makes USDC Unique?
Besides having segregated reserve accounts that are kept in leading US financial institutions, USDC is audited by Grant Thornton, an independent accounting and consulting firm. Unlike Tether’s USD, USDC releases its financial attestation reports monthly. As such, USDC is widely considered the most regulated and thus secure stablecoin for professional investor and businesses. In addition, USDC has established itself as one of the most popular stablecoins in the decentralized finance (DeFi) market.
BUSD (Binance USD)
What is Binance USD?
Binance USD (BUDS) is a fiat-backed, regulated stablecoin that is pegged at a 1:1 ratio to the US dollar. Like USDT and USDC, every unit of BUSD in circulation means there is one US dollar held in reserve. BUSD holders can swap their Binance USD tokens for fiat and vice versa. Binance USD is the third-largest stablecoin by market capitalization, with a circulating supply of over 12 billion coins, and is issued by Paxos.
How Does Binance USD Work?
The mechanism around how BUSD works is quite similar to other stablecoins in this guide. BUSD holders can easily exchange one BUSD for one US dollar from the reserve. When you send BUSD, Paxos burns the token and you get fiat currency in return. Because of this mechanism, BUSD can maintain its 1:1 ratio to the US dollar.
If the price of Binance USD starts to dwindle to less than $1 per 1 BUSD, arbitrager traders can buy BUSD in large amounts and convert the same into fiat via the Paxos platform. Naturally, increased demand for Binance USD results in a price surge causing the price to go back to $1 restoring the 1:1 BSUD:USD price anchorage ratio. This same mechanism also works for other centralized stablecoins, such as USDT and USDC.
Pros & Cons of BUSD
Pros
Backed by FDIC-insured US banks
Conducts monthly financial audits done by Withum firm
Zero marker fees when trading BUSD on Binance
Cons
BUSD cannot be mined
It’s not decentralized
What Makes BUSD Unique?
Binance USD is not only an ERC-20 token, but it also supports the Binance token standards, BEP-2 and BEP-20., enabling the stablecoin to be used in the burgeoning decentralized finance market on BNB Smart Chain.
Moreover, BUSD is audited monthly and the results are shared openly with the public. In addition, traders aren’t charged any fees on Binance or Paxos for purchasing or redeeming BUSD
What is DAI?
DAI is an Ethereum-based stable-price cryptocurrency developed and issued by the Maker Protocol and managed by a decentralized autonomous organization known as MakerDAO.
As the fourth-largest stablecoin by market capitalization, DAI’s circulating supply currently stands at over five billion tokens. DAI is collateralized by a blend of other digital currencies that get deposited into smart contract vaults each time a new DAI is minted to maintain relative price stability with the US dollar.
How Does DAI Work?
DAI is a crypto-collateralized stablecoin that is soft-pegged to the US dollar. DAI users can create DAI by depositing Ethereum-based digital assets into Maker Vaults in the Maker Protocol. These assets are then used as collateral to maintain DAI’s 1:1 ratio to the US dollar.
Users can easily create Vaults by accessing Maker Protocol via Oasis Borrow. Alternatively, users can also use other interfaces developed by the community and lock collateral like ETH, LINK, MANA, and WBTC, among others. Once the collateral is locked, users can borrow against their surety in DAI, provided that it’s not more than the collateral ratio provided.
Pros & Cons of DAI
Pros
Decentralized
Multi-collateral
Highly integrated digital asset in the DeFi market
Cons
Has fewer trading pairs
Its price can fluctuate because it's crypto-collateralized, not fiat-backed
Not as liquid as other leading stablecoins
What Makes DAI Unique?
DAI has a soft-peg to the US dollar. A soft-peg is an exchange rate regime that’s used to preserve the value of a currency against a fixed currency or reserve currency.
Additionally, DAI is managed by a decentralized autonomous organization (DAO) through a software protocol. This means that all DAI token issuance and burning are publicly managed and recorded self-executing smart contracts that Ethereum powers therefore, the entire ecosystem is not so prone to corruption, and is highly transparent. Additionally, the process of creating DAI software is democratic as it’s done by direct voting.
PAX (Paxos Standard)
What is Paxos Standard?
Paxos Standard is a stablecoin issued by Paxos Trust Company and is anchored to the US dollar. It’s an ERC-20 coin built on the Ethereum blockchain that’s regulated by the NYFDS. PAX enjoys its price stability thanks to the 1:1 backing with the US dollar.
How Does Paxos Standard Work?
Paxos Standard is used as a reliable payment instrument for blockchain and crypto assets to curb crypto asset volatility and eliminate cross-border transaction challenges.
Users can tokenize the US dollar to PAX by sending US dollars to the Paxos Trust Company's bank account. Paxos will then mint an equal amount of PAX, which is then deposited to the user’s wallet, and the US dollar is kept in the bank account. The inverse is used when redeeming PAX to USD. Once PAX tokens have been redeemed, they are burned and removed from circulation.
Users can purchase PAX from its website. Additionally, Paxos Trust Company does not charge users any fees for converting or redeeming PAX tokens. However, the amount of PAC you can convert is capped at $100.
Pros & Cons of PAX
Pros
Backed by US dollar assets held in regulated US bank accounts
Regulated by the NYFDS
Cons
Has a minimal conversion amount
Not as liquid as other leading stablecoins
Only supported by Ethereum and BNB Smart Chain
What Makes PAX Unique?
PAX meets the highest standards of consumer protection as it’s regulated by the NYFDS. Moreover, its assets are bankruptcy remote, which means that should Paxos Trust Company become insolvent, its customers' assets can’t be used to satisfy the company’s debt.
##Getting started with StablecoinsNearly 200 stablecoins exist in the crypto market today, each with particular features and use cases in mind. The five stablecoins listed in this guide are the leading and most trusted stable digital currencies, with the highest market capitalizations and deepest liquidity. Therefore, if you are looking to start using stablecoins, one of these five is probably a good place to start.
To securely store, send, receive, and swap stablecoins, download Trust Wallet today!
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Note: Any cited numbers, figures, or illustrations are reported at the time of writing, and are subject to change.
Simple and convenient to use, seamless to explore
Download Trust WalletAs a cryptocurrency enthusiast with in-depth knowledge of stablecoins, I'd like to delve into the concepts presented in the article "Top 5 Stablecoins and the Differences Between Them." The author provides valuable insights into the world of stablecoins, focusing on their importance in mitigating price volatility and their role in the cryptocurrency industry.
Stablecoins are a category of cryptocurrencies designed to maintain a stable value by pegging it to a commodity or fiat currency. They address the price volatility issues inherent in cryptocurrencies like Bitcoin, making them crucial for facilitating transactions and storing value without being affected by market fluctuations.
The article introduces four types of stablecoins: algorithmic, commodity-backed, crypto-collateralized, and fiat-backed. These types are designed to peg the stablecoin's value to a stable asset, usually the US dollar. The top 5 stablecoins highlighted in the article are USDT (Tether), USDC (USD Coin), BUSD (Binance USD), DAI, and PAX (Paxos Standard).
Let's briefly explore each stablecoin mentioned in the article:
-
USDT (Tether):
- Unique Characteristics: Tether is a centralized stablecoin pegged 1:1 to the US dollar. It's not decentralized and operates on various blockchains, including Ethereum, Tron, and Solana. The company behind Tether, Tether Limited, controls issuance and maintains reserves to back the USDT in circulation.
- Pros & Cons: High liquidity, wide acceptance, and stability due to fiat reserves. However, it's not decentralized, and USDT cannot be mined.
-
USDC (USD Coin):
- Unique Characteristics: USD Coin is fully backed by US dollar assets but is not issued by the US government. It's regulated by CENTRE, led by Coinbase and Circle, and undergoes monthly audits by Grant Thornton. It operates on multiple blockchains, including Ethereum and Stellar.
- Pros & Cons: High market cap, stability, and regulatory compliance. Similar to USDT, it's not decentralized, and USDC cannot be mined.
-
BUSD (Binance USD):
- Unique Characteristics: Binance USD is a fiat-backed stablecoin issued by Paxos. It is pegged 1:1 to the US dollar, and BUSD holders can easily exchange it for fiat. It supports multiple blockchain standards, including ERC-20 and Binance token standards (BEP-2 and BEP-20).
- Pros & Cons: Backed by FDIC-insured US banks, conducts monthly financial audits, and supports Binance token standards. Like other stablecoins, it's not decentralized, and BUSD cannot be mined.
-
DAI:
- Unique Characteristics: DAI is an Ethereum-based stablecoin issued by the Maker Protocol and governed by a decentralized autonomous organization (DAO). It is collateralized by a blend of digital assets, allowing users to create DAI by depositing collateral into Maker Vaults.
- Pros & Cons: Decentralized, multi-collateral, and managed by a DAO. However, it has fewer trading pairs and is not as liquid as other stablecoins.
-
PAX (Paxos Standard):
- Unique Characteristics: Paxos Standard is an ERC-20 stablecoin anchored to the US dollar and regulated by the NYFDS. It ensures consumer protection by meeting high regulatory standards and maintaining assets in bankruptcy-remote accounts.
- Pros & Cons: Backed by US dollar assets in regulated bank accounts, regulated by the NYFDS. However, it has a minimal conversion amount and is not as liquid as other stablecoins.
The article emphasizes that these stablecoins are widely supported by Trust Wallet, a multi-chain and self-custody wallet with over 60 million users. This information is crucial for readers interested in securely storing, sending, receiving, and swapping stablecoins.
In conclusion, the article provides a comprehensive overview of the top 5 stablecoins, highlighting their unique features, use cases, and the platforms supporting them. It serves as a valuable resource for anyone looking to understand and engage with stablecoins in the cryptocurrency market.
