What makes a stablecoin stable?

What are stablecoins?

We’ve been stablecoin fans for a while here at Wirex. We welcomed our very first one, DAI, to the platform back in 2019, and have since introduced several more exciting additions.

In case you need a reminder, stablecoins are cryptocurrencies that are pegged to an external asset, such as another currency (like USD) or a commodity (like gold). Being pegged to another asset class helps reduce volatility while still offering the many benefits of conventional cryptocurrencies, such as increased transaction speeds, a higher level of security and lower costs.

What makes a stablecoin stable?

You’ve probably come across fiat-collateralised stablecoins before, or even those which are backed by other cryptocurrencies. But how much do you know about algorithmic stablecoins?

Whereas fiat or crypto-backed stablecoins keep their price stable by maintaining reserve assets as collateral, algorithmic stablecoins work slightly differently - they use an algorithm to maintain a consistent value.

While they are not backed by any real-world asset, algorithmic stablecoins are pegged to fiat currencies. They maintain this peg by manipulating the supply of a stablecoin - the protocol mints (adds) or burns (removes) tokens in line with the price movement to keep its value stable. If its price drops below $1, tokens are removed from circulation, and vice versa.

An algorithmic stablecoin you’ve probably heard of is Dai (DAI). One of the oldest and most popular stablecoins on the market, DAI maintains its value through an automated system of smart contracts on the Ethereum blockchain. Unlike many algorithmic stablecoins, DAI is multi-collateral, which means it can use multiple different currencies as collateral.

To generate DAI, Ethereum-based assets (ether (ETH), basic attention token (BAT), USD Coin (USDC), compound (COMP), etc.) must be submitted into a smart contract, which uses them as collateral in maintaining DAI’s peg to the US dollar. Since DAI is soft-pegged to the dollar, it maintains its value of $1 even when the market is volatile.

Which stablecoins are the most popular?

Aside from UST, there are several other stablecoins you’ve probably heard of.

Tether (USDT) – USDT is a well-established player in the stablecoin space. It was designed to be backed by the USD Dollar to maintain a stable value and reduce volatility. It is also the 5th largest cryptocurrency by market cap.

USD Coin (USDC) - one of the best-known stablecoins around, Circle’s USD Coin is pegged 1:1 to the United States Dollar. It’s backed by cash and short-duration US Treasuries with a whopping 32.5 billion USDC in circulation as of October 2021.

Stasis Euro (EURS) - launched in 2018, EURS is a tokenised version of the euro. It combines the transparency and immutability of blockchain technology with the reputation and stability of the world’s second most traded currency.

So, there’s the lowdown on stablecoins – which ones do you have in your Wirex account?