The stablecoin market, led by USDT and USDC, continues to grow with the recent addition of RLUSD. In this guide, we’ll explore what collateralized stablecoins are, their significance, and the advantages they offer compared to other types of stablecoins, such as algorithmic ones.
What are collateralized stablecoins?
Collateralized stablecoins are cryptocurrencies backed by assets like fiat money, commodities, or digital assets. Well-known examples such as USDT, USDC, DAI, and the new Ripple stablecoin (RLUSD) are pegged to the value of the US dollar and are supported by reserves of cash, debt, or cryptocurrency deposits.
Where can you buy collateralized stablecoins?
Popular stablecoins like USDT, USDC, and RLUSD can be purchased directly from issuers by making a bank deposit. For retail investors, the easiest way is to buy these stablecoins on centralized and regulated exchanges.
How do collateralized stablecoins work?
These stablecoins are issued in response to demand. Generally speaking, the process for centralized stablecoins like Tether, Circle, and Ripple is as follows:
1. The user deposits US dollars into the issuer’s account.
2. The issuer creates new tokens and sends them to the buyer’s wallet.
When holders want to redeem their stablecoins for fiat, the process is reversed: tokens are sent back to the issuer to be “burned,” and the user receives fiat currency. For decentralized stablecoins like DAI, the process is similar but automated via smart contracts and fully backed by cryptocurrencies.
Popular stablecoins in 2024
USDT remains the dominant stablecoin in the crypto space, ranking as the third-largest cryptocurrency by market capitalization. USDC follows but holds a much smaller share. RLUSD, Ripple’s stablecoin, has generated a lot of excitement and could compete with DAI and FDUSD for market share.
Why choose collateralized stablecoins?
Collateralized stablecoins are the most widely used for both trading and holding funds. USDT and USDC dominate the dollar-backed stablecoin market, though they are centralized tokens in a space that emphasizes decentralization.
The key difference between centralized options like USDT and RLUSD and decentralized ones like DAI lies in how they are backed and managed. Many DeFi users prefer stablecoins managed by smart contracts and backed by cryptocurrencies rather than traditional fiat.
While algorithmic stablecoins are also an option, the collapse of projects like Terra has increased trust in collateralized stablecoins, which are now viewed as a safer choice to protect funds from the volatility of the crypto market.
