What is a stablecoin and what are the recommended stablecoins to watch out for in 2024?

What is a stablecoin and what are the recommended stablecoins to watch out for in 2024?

What are Stablecoins? Why you should care about them

The volatility of the cryptocurrency market scares many investors, which makes stablecoin a relatively safe option. Stablecoins are designed to maintain a stable value in relation to fiat currencies or other assets, allowing users to trade without fear of drastic price fluctuations. Choosing the right stablecoin will be an important strategy for investors, especially with the development of major stablecoin programs in 2024. Today, we're going to take a closer look at what a stablecoin is and what stablecoin options to watch out for in 2024.

What is Stablecoin? How does it work?

A stablecoin is a type of cryptocurrency whose value is pegged to a stable asset (usually a fiat currency such as the U.S. dollar, euro, etc.) in order to reduce price volatility and provide stability in the cryptocurrency market. Common stablecoins include USDT (Tether), USDC (USD Coin), and DAI, etc., whose value is usually pegged 1:1 to a fiat currency such as the US dollar. This design makes stablecoins an excellent store of value and a medium of exchange, especially for cross-currency trading or hedging risk in the cryptocurrency market.

Classification of Stablecoins: Fiat Guarantees, Crypto Guarantees and Algorithmic Stablecoins

Stabilized coins can be classified into three main types based on the type of guarantee behind them: fiat-guaranteed, crypto-guaranteed and algorithmic stabilized coins.

• Fiat Guaranteed Stabilizers: These are the most common type of stabilizers and are usually guaranteed by an equal amount of fiat currency deposits held by the issuer and backed by a corresponding fiat currency reserve each time a stabilizer is issued. Typical examples include USDT and USDC, which usually maintain a value of around $1 and are regulated by a transparent organization.

• Crypto-Guaranteed Stablecoin: This type of stablecoin is guaranteed by other cryptocurrencies, such as MakerDAO's DAI, which is backed by cryptocurrencies such as Ether (ETH), and is managed automatically through smart contracts to ensure the stability of the stablecoin's value.

• Algorithmic Stablecoins: The value of these stablecoins is not guaranteed by any asset, but rather by smart contracts and algorithms that adjust the supply and keep the price stable. For example, TerraUSD (UST) is a typical algorithmic stablecoin, but due to the lack of stable value backing, it had a massive crash in 2022.

Recommended Stablecoins to Watch in 2024

As the stablecoin market grows, many emerging projects are improving their transparency and stability. Here are a few stablecoin projects to watch out for in 2024:

1. Tether (USDT)
Tether is currently the largest and most popular stablecoin by market capitalization. As a fiat-guaranteed stablecoin, Tether is backed by sufficient U.S. dollar reserves and has high liquidity. Although it has faced some controversy over its transparency, Tether has now strengthened its auditing mechanism to increase trust. USDT remains one of the most reliable options for investors who want to stabilize their capital in the cryptocurrency market.

2. USD Coin (USDC)
USDC is a stablecoin program co-sponsored by Circle and Coinbase. Similar to Tether, USDC is a fiat-guaranteed stablecoin and is regularly audited by a third party. It is issued in a more transparent manner and is supported on a number of blockchains, including Ether, Solana, etc. The stability and transparency of USDC has made it one of the most important mediums of exchange in the cryptocurrency market.

3. DAI
DAI is a decentralized stablecoin backed by the MakerDAO smart contract system. It features a decentralized issuance mechanism that makes it independent of any centralized institution or fiat currency reserve.DAI is a common currency in many Decentralized Finance (DeFi) applications as the issuance process is more open and transparent and can be issued by pledging crypto assets.

4. TrueUSD (TUSD)
TrueUSD is a stablecoin issued by TrustToken, and similar to Tether and USDC, it is also guaranteed by the fiat currency USD.The most important feature of TrueUSD is that it offers greater transparency and monthly audit reports, which is very attractive to investors who have higher requirements for security and compliance.

5. Paxos Standard (PAX)
Paxos Standard is a stablecoin issued by the Paxos Trust Company and is regulated by a U.S. government agency, providing a safe alternative in the stablecoin market.PAX derives its stability from its 1:1 U.S. Dollar guarantee and has regular audits to ensure the integrity of its reserves.

A few things to keep in mind when choosing stablecoins

When choosing a stablecoin, you should not only look at its market capitalization and the blockchain platform it uses, but also focus on the following elements:

• Reserve Transparency: Whether the reserve of the stabilized currency is sufficiently transparent and whether there are regular audit reports. Stablecoins with high transparency can better protect investors' confidence.

• Reputation of the issuer: Whether the company or organization issuing stablecoins has a good reputation in the market will have a direct impact on the stability of the value of stablecoins.

• Liquidity: A liquid stablecoin makes it easier to trade and transfer funds in the cryptocurrency market.

• Blockchain support: Whether or not a stablecoin supports multiple blockchain platforms will affect its ease of cross-chain operation and scope of use.

Frequently Asked Questions Q&A

1. Is stable money completely risk-free?
Although stabilized currencies are designed to maintain price stability, it does not mean that they are completely risk-free. Reserve issues, credit risk of issuers and fluctuations in market conditions may affect the stability of stable money. Investors should pay attention to the relevant transparency reports and risk warnings.

2. How does a stablecoin stabilize value?
The stability of a stablecoin's value is usually guaranteed through reserves, which may be fiat currencies or other crypto assets. When the price of a Stablecoin deviates from its target value, the market supply is adjusted by issuing additional Stablecoins or recalling Stablecoins to maintain price stability.

3. Can Stablecoins be used for investment?
Stabilized coins do not have the potential to appreciate in value on their own; they are primarily used as a fund depository or medium of exchange. In the cryptocurrency market, the use of Stablecoins can help investors hedge against volatility risk and provide a relatively stable asset.