In the stablecoin market, no battle rages harder than the colossal conflict of USDT vs. USDC. Stablecoins are widely considered the most useful application of DeFi and blockchain technology. While many value-pegged cryptocurrencies exist, Tether (USDT) and USD Coin (USDC) are light years ahead of the crowd.
Before directly comparing the crypto market’s most popular stablecoins, we first need to ask the burning questions.
What are stablecoins? Are these fiat-pegged digital currencies work, and are they truly safe to use?
What Are Stablecoins?
Stablecoins are a kind of cryptocurrency pegged to the value of other assets, like fiat currencies or gold. The most common stablecoins in the crypto market are pegged to US Dollars, although new coins pegged to other fiat currencies like EUR and RMB are slowly emerging.
These crypto assets live on the blockchain, providing a somewhat safe refuge from the market’s iconic volatility. In a perfect world, these digital assets are designed to maintain a stable value, regardless of fluctuations in the crypto market.
What are the different kinds of stablecoins, and how do they work?
How Do Stablecoins Work?
Depending on how they’re created and issued, stablecoins can be both centralized or decentralized. Most blockchain-based stablecoins fall into one of three distinct categories.
Fiat-Backed Stablecoins
Widely considered the safest variety, fiat-backed stablecoins are supported by their corresponding fiat currency reserves. Coins are backed 1:1 with an equal amount of fiat, which the issuer holds in reserve. USDT, USDC, and Binance USD (BUSD) are all excellent examples of fiat-backed cryptocurrencies.
Let’s use an issuer like Tether as an example. If I want one USDT token, I simply provide one USD to their reserves and receive one USDT in return. When I want fiat currency, I can redeem any USDT token in exchange for one USD.
Fiat-backed coins are the most resilient stablecoins. They typically recover strongly when de-pegging, or divergence from their intended value, occurs. These coins are centralized by nature, because they’re controlled by a central authority who governs stablecoin issuance and redemption.
Collateralized Stablecoins
Collateralized stablecoins are backed by other assets that are not fiat currency, like Bitcoin (BTC) or traditional assets like gold. Instead of providing fiat in exchange for stablecoins, users lock external assets into issuer protocols to mint the corresponding value in stablecoins.
For example, I could lock up 1 BTC within a protocol and receive 1 BTC worth of DAI, a popular collateralized stablecoin. These cryptocurrencies are popular in DeFi communities because these coins enjoy decentralized governance.
Unfortunately, collateralized stablecoins are generally less secure than fiat-backed coins because their value is derived from other assets. If the value of the provided collateral slips beneath the redeemable value of the number of coins in circulation, collateralized stablecoins are liable to depeg and don’t have the funds to recover.
Algorithmic Stablecoins
The wildest of the bunch, algorithmic stablecoins are cryptocurrencies that maintain a stable value through smart contracts. These blockchain-based contracts automatically buy and sell reserve currencies to ensure that coins stay at their intended value. Cardano’s native stablecoin, DJED, is an excellent example of algorithmic coins in action.
These coins are the most decentralized of all their peers, but also the most vulnerable. An algorithmic stablecoin, UST, was responsible for one of crypto history’s most devastating crashes when it lost its peg in May 2022.
Why Are Stablecoins so Important?
In the early days of the crypto market, all cryptocurrency prices were paired off against Bitcoin and Ethereum. The only way to realize profits was to sell digital assets back to fiat currencies and withdraw them back to a bank account via a cryptocurrency exchange.
🔸If the cryptocurrency industry was ever going to mature, it needed stability and refuge from its inherent volatility. BTC and ETH were unreliable currencies of exchange because their value was constantly in flux.
🔸Traders needed to be able to trade into a secure asset that would maintain a stable value on-chain. Since then, stablecoins have grown exponentially and fulfill a multitude of use cases in the industry.
🔸Fast transactions – While fiat transfers between bank accounts are limited to business hours and lengthy processing times, stablecoins can be sent and received within seconds.
🔸DeFi assets – Stablecoins can be lent out to DeFi enthusiasts at generous interest rates, used as collateral for crypto-backed instant loans, and deposited in staking contracts.
🔸Cross-border payments typically take days to process and charge extortionate fees. Stablecoin transfers have low transaction fees and are executed in seconds.
🔸Stable wealth in self-custody – Storing digital assets in self-custody and being your own bank is one of the fundamental pillars of cryptocurrency. Stablecoins allow you to store funds on-chain, without being exposed to fluctuations in crypto prices.
