The Best Stablecoins (You Should Know About)

What Are Stablecoins?

Stablecoins are a type of cryptocurrency designed to maintain a stable value. They are typically ‘pegged’ to a fiat currency like the U.S. Dollar, commodities such as silver or gold, or traditional cryptocurrencies. The stablecoin and its pegged asset should be interchangeable. For example, if a stablecoin is pegged to the U.S. Dollar, it should always be worth one U.S. Dollar.

Stablecoins are like fiat currency on-chain: they benefit from the capability of peer-to-peer transfer and transparency while avoiding the short-term volatility associated with traditional crypto assets. 

However, not all stablecoins work in the same way. Different stablecoins use various mechanisms for pegging, collateralization, and redeemability, significantly affecting their stability, decentralization, and risk profile.

The Different Types of Stablecoins

Stablecoins come in a few different types based on the mechanism they use to maintain their value. The main types of stablecoins are algorithmic stablecoins, crypto-backed stablecoins, and fiat-backed stablecoins

Algorithmic Stablecoins

Algorithmic stablecoins use smart contracts and algorithms to control the stablecoin supply, aiming to maintain a stable value. Instead of being backed by a reserve of assets (like fiat currency), these stablecoins rely on complex algorithms that adjust the coin’s supply based on market demand.

For instance, if the price of an algorithmic stablecoin rises above its peg, the algorithm issues more tokens to increase the supply and bring the price back down. Conversely, if the price falls below the peg, the algorithm buys back tokens or reduces the supply to push the price back up.

Advantages of Algorithmic Stablecoins

The main advantage of decentralized algorithmic stablecoins is that they don’t depend on centralized entities, which lowers the risk of regulatory control and mismanagement. They are mostly decentralized and trustless. 

This supports the goal of creating a financial system that is less vulnerable to censorship and external control.

Disadvantages of Algorithmic Stablecoins

Algorithmic stablecoins carry significant risks. They are heavily dependent on the effectiveness of their code and market confidence. Any flaws in the algorithm or significant market shifts can cause the stablecoin to lose its peg, potentially leading to a collapse in value. 

Crypto-Backed Stablecoins

Crypto-backed stablecoins are collateralized by other cryptocurrencies. Users lock up their crypto assets in a smart contract to receive an equivalent value in stablecoins. These stablecoins are usually over-collateralized to account for the volatility of the backing assets.

This means that if crypto markets start to go down, the value of collateral is also less, possibly causing borrowers to default on payments. When this happens, the protocol automatically liquidates some of the collateral to cover the stablecoin issued.

Advantages of Crypto-backed Stablecoins

The prices of crypto-backed stablecoins don’t necessarily rely on fiat currencies, and thus may not be subject to inflation and regulation. For example, since Bitcoin is a decentralized currency, the value of which fluctuates separately from fiat currencies like the dollar or euro. In times of economic uncertainty, relying on crypto-backed stablecoins may be preferable. 

Disadvantages of Crypto-backed Stablecoins

For crypto-backed stablecoins, their decentralization is only as strong as the decentralization of their collateral. If the assets backing the stablecoin are controlled by centralized entities, then the stablecoin itself cannot truly be decentralized, regardless of its design.

They also depend on the stability of their collateral currencies and must be overcollateralized with diverse assets, making them vulnerable during market crashes. If a cryptocurrency backing the stablecoin fails and the collateral is not diversified with other stable assets, the stablecoin may depeg (i.e. the value of the coin drops lower than its pegged asset).

Moreover, if the value of the collateral drops too quickly or too significantly, the liquidation process may not cover the full value of the issued stablecoins. This then leads to a loss of confidence and a depegging of the stablecoin. 

Fiat-Backed Stablecoins

Fiat-backed stablecoins are backed by fiat currencies like the U.S. Dollar, Euro, or other government-issued money. For every stablecoin issued, there is an equal amount of fiat currency held in reserve by the issuing entity. This backing can be in the form of the asset the token represents in the first place, bank deposits, or other cash equivalents.

For example, Tether (USDT) and USD Coin (USDC) are both pegged to the U.S. Dollar. While these coins are both fiat-backed, it’s not entirely accurate to say that they are 100% backed by USD. Both USDT and USDC are backed by USD and cash equivalents. So while they may not be backed entirely by the pegged asset, the issuer has access to liquidity of the same value of the tokens they have distributed.

Advantages of Fiat-Backed Stablecoins:

Fiat-backed stablecoins are backed by something with value. Having a 1:1 backing guarantees the peg. This is more reliable than maintaining a peg with code, as the assets you use are actually stored in reserves somewhere. 

Moreover, fiat-backed stablecoins act as fiat on-chain, benefiting from blockchain’s security and cross-border capabilities. They can be a simple and easy way to take profits without withdrawing your funds to exchanges since they are pegged to the value of fiat currencies.

Since this backing is under government control and rests with a central authority, it also inherits the security and stability of the central systems. 

Disadvantages of Fiat-Backed Stablecoins:

A major drawback of fiat-backed currencies is rooted in their centralized nature. Pegging a crypto coin to fiat reintroduces third-party risk and regulation, going against crypto’s trustless and censorship-resistant goals. Fiat-backed stablecoins rely on a central organization, making them vulnerable to regulatory pressure, mismanagement, or corruption. If reserves or distribution are mishandled, the coin could lose its peg.

Counterparty risk is the biggest risk for fiat-backed stablecoins. They rely on reserves stored in the bank. If the bank fails, the reserves go along with it. With no backing, the issuer has no liquidity, thus the stablecoin depegs. The risk comes from having to trust the counterparty (i.e. the bank) that the issuer is using. 

Lastly, fiat-backed stablecoins rely on inflationary government currencies and must follow local regulations. If laws change suddenly, issuers may be forced to stop operations, causing the coin to lose its value.

Top Stablecoins to Know

There isn’t technically a ‘best’ stablecoin. Instead, you might choose a stablecoin (or a set of stablecoins) depending on your specific needs. To work that out, it’s great to understand the different types of stablecoins available, diving into how they are suited for different purposes, their security features, and their approach to decentralization.

Tether (USDT)

Tether (USDT) is a fiat-collateralized stablecoin issued by Tether Limited, a company owned by iFinex. Originally launched as RealCoin in July 2014 and rebranded to Tether in November 2014, it has become the largest stablecoin in the cryptocurrency market.       

USD Coin (USDC)

USD Coin (USDC) is a fiat-collateralized stablecoin that is pegged to the U.S. Dollar. It was first released on September 26, 2018, as a result of a collaboration between Circle and Coinbase. USDC is designed to tokenize U.S. Dollars and allow them to be used on public blockchains and the internet.

Dai (DAI)

DAI is a decentralized stablecoin issued by MakerDAO, launched in December 2017. It maintains a soft peg to the U.S. Dollar and has a market capitalization of over $5 billion. DAI operates on the Ethereum blockchain as an ERC-20 token but can also be found on other blockchains through cross-chain bridges.

First Digital USD (FDUSD)

First Digital USD (FDUSD) is a stablecoin issued by First Digital Trust Limited, a Hong Kong-based financial firm. Launched on June 1, 2023, FDUSD has quickly risen to prominence, reaching a market cap of $3.85 billion as of May 2024. Recently, FDUSD has expanded to the Sui network, making it the first native 1:1 stablecoin on Sui. FDUSD’s stability is backed by cash reserves and investments in U.S. Treasuries, although S&P Global Ratings has deemed its ability to maintain a peg to the U.S. Dollar as ‘constrained.’ 

USDD (USDD)

USDD is a decentralized stablecoin governed by the TRON DAO Reserve and closely affiliated with the TRON blockchain. it was launched by Chinese entrepreneur Justin Sun. USDD has a market capitalization of $725 million. Initially launched on the TRON network, it is also available on other prominent blockchains.

TrueUSD (TUSD)

TrueUSD (TUSD) is a digital currency pegged to the U.S. Dollar, offering stability and transparency through real-time attestations of its reserves. It is issued by TrustToken, now operating as Archblock, and was launched in mid-2018. The platform’s transparency is enhanced by regular audits and attestations from independent accounting firms.

Frax (FRAX)

Frax (FRAX) is a unique stablecoin that combines aspects of both asset-backed and algorithmic stablecoins, aiming to provide a scalable, trustless, and stable on-chain currency. Issued by Frax Finance, it was launched in December 2020. The protocol’s security and decentralization are supported by a governance structure that allows FXS holders to influence key decisions and parameters within the system, ensuring robust community participation and oversight.

PayPal USD (PYUSD)

PYUSD, the stablecoin ticker for PayPal USD, was issued by Paxos Trust and launched in August 2023. PYUSD is fully backed by U.S. Dollar deposits, short-term U.S. Treasuries, and similar cash equivalents, ensuring its value remains pegged to the U.S. Dollar at a 1:1 ratio. 
In terms of security and decentralization, PYUSD benefits from the regulatory oversight provided by the New York State Department of Financial Services, although it remains a centralized stablecoin, given its issuance and management by a single entity, Paxos Trust Company.

Pax Dollar (USDP)

Pax Dollar (USDP) is a fiat-collateralized stablecoin launched by Paxos in September 2018. The ticker for Pax Dollar is USDP. It is fully backed by U.S. Dollars held in Paxos-owned U.S. bank accounts, ensuring a 1:1 ratio with the U.S. Dollar. Despite its regulatory framework, USDP remains a centralized stablecoin since its issuance and reserves are managed by Paxos.

Liquidity USD (LUSD)

Liquity USD (LUSD) is a decentralized stablecoin introduced by the Liquity protocol in 2021. It is designed to maintain its value at a 1:1 ratio with the U.S. Dollar, exclusively using Ethereum (ETH) as collateral. LUSD’s market cap reflects its growing adoption among crypto natives who prioritize censorship resistance and stability. As a fully decentralized stablecoin, LUSD offers a robust alternative to centralized and fiat-collateralized stablecoins, maintaining security and decentralization through the liquidity protocol.

USDA (USDA)

USDA, unlike volatile cryptocurrencies like Bitcoin or Ethereum, USDA tracks the price of the U.S. Dollar, offering stability for blockchain trades. This parity is achieved through reserves of tokenized Treasury Bills, Government Bonds (RWAs), Ethereum, Bitcoin, and other USD liquid stablecoins, with stability mechanisms enforced by multi-audited smart contracts. Beyond stability, USDA provides a permissionless on-chain Dollar savings solution, enabling users to earn passive yields. Issued by Angle, a protocol renowned for its resilient stablecoin infrastructure.

Key Considerations When Choosing Stablecoins

Security

Stablecoin security is extremely important. For starters, make sure that whichever stablecoin you choose, it’s reputable. Don’t buy stablecoins you’ve never heard of as they might not be as safe as they claim.

Next, it’s important to note that stablecoins that rely on smart contracts are vulnerable to potential bugs in their code. Algorithmic and crypto-backed stablecoins are particularly susceptible to these risks.

For example, the Beanstalk stablecoin protocol was exploited through a flash loan attack. The attacker borrowed a large amount of Beanstalk’s governance token using a flash loan from Aave, giving them enough voting power to pass a malicious proposal to steal the protocol’s funds.

Finally, understanding how the reserves are managed and audited is vital. Thus, most reputable stablecoins will undergo regular audits, such as proof-of-reserves audits, and publish the details of their reserves periodically in the spirit of transparency.

Decentralization

Stablecoins each approach decentralization differently. While some stablecoins are fiat-backed and issued and managed by centralized entities, others are algorithmic and are managed by DAOs instead. These approaches have a significantly different impact on decentralization. 

While algorithmic coins are the most decentralized, some crypto-backed coins also aim to offer a decentralized solution. However, just because a stablecoin is backed by crypto, that doesn’t mean it’s decentralized.

Crypto-backed stablecoins are usually backed by a range of different cryptocurrencies, some of which will include other stablecoins. This leaves them reliant on the security and decentralization of the cryptocurrencies they are backed by.

If it’s backed by a traditional currency, extreme volatility can lead to depegging. Then if the stablecoin is backed by a fiat-backed stablecoin with a centralized issuer it’s no longer fully decentralized. it’s subject to the same counterparty risk as its backing—albeit to a lesser degree.

Decentralized stablecoins are often managed by DAOs rather than centralized organizations. Using this model, holders of governance tokens can vote on key issues such as changes to the protocol, collateral types, and stability mechanisms. For example, in MakerDAO, holders of the MKR token participate in governance decisions affecting the DAI stablecoin.

However, the involvement of DAOs introduces additional risks. While DAOs aim to decentralize control and make governance more democratic, they are not infallible. A small number of large token holders (“whales”) can influence the DAO’s decisions, leading to centralization of power and potential manipulation. Plus, the smart contracts that underpin them can have bugs or vulnerabilities that, if exploited, could lead to significant financial losses. Incorrect implementations of smart contracts could cause the collapse of a DAO.

Why Are Stablecoins an Important Digital Asset in the Crypto Landscape

Stablecoins offer a way to use fiat currencies while benefiting from the advantages of blockchain technology. Ledger devices make managing these digital assets secure and straightforward, ensuring your investments remain protected from online and physical threats. Your Ledger device, coupled with the versatile Ledger Live app,  gives you the power to securely store and manage stablecoins and other cryptocurrencies with self-custody and uncompromising security.  

So what are you waiting for? Get yourself a Ledger device and start managing your stablecoins with confidence and self-custody. Because if not self-custody, then why crypto?

Frequently Asked Questions about Stablecoins

Why are stablecoins important?

Stablecoins are important because they provide a fiat-backed, stable, low-volatility asset on-chain. 

How do stablecoins work?

Stablecoins work by pegging their value to a reserve asset, such as fiat currency, commodities, or other cryptocurrencies, via collateralization or code.

Are stablecoins safe to use?

Stablecoins are considered generally safe to use, but their safety depends on the underlying technology, the transparency of the reserve holdings, and the management practices of the issuing entity.

How are stablecoins created and maintained?

Stablecoins are created by depositing collateral (fiat, crypto, or other assets) with the issuing entity, which then mints new stablecoins. They are maintained by managing the reserves and ensuring the stablecoin’s value remains pegged to the reserve asset.

How to buy stablecoins?

Stablecoins can easily be bought on the Ledger Live app, offering a secure and seamless user experience. 

Ledger’s integration with various buy providers ensures competitive rates and a smooth transaction process. The app’s user-friendly interface, allows you to acquire stablecoins directly to your hardware wallet, maintaining full control and ownership of your assets. 

The Ledger Live app provides peace of mind as you expand your crypto portfolio. Simply navigate to the ‘Buy’ section within the app, where you’ll find a range of stablecoins available for purchase.