What is a Stablecoin? Top 5 Stablecoins by Marketcap

Have you heard of this term Stablecoin, quite often while glancing through the cryptocurrency markets, but still do not have a clear idea about its function and purpose in the world of cryptos? So what is a Stablecoin means, in the simplest of terms, Stablecoins are nothing but the equivalent of real currencies, but in the form of digital assets. Most of the stablecoins will be equivalent to the US Dollar. Just as the name of the asset suggests, the value of these coins will not fluctuate much and will be mostly stabilized in order to stay equivalent to the value of the original currency. In this article, we will be discussing everything that you need to know about Stablecoins and 5 of the top Stablecoins that currently dominate the cryptocurrency market. These entries are based on the statistics of Market capitalization. 

What is a Stablecoin?

Stablecoins are a type of cryptocurrency with a stabilized value. In order to stabilize the value of these coins, we peg them to other assets. In most cases, the assets we peg them to would either be a fiat currency or reserve-held commodities. When it comes to fiat currencies, the US dollar can be considered an example. Gold and other popular cryptocurrencies belong to the category of commodities held in reserves. No matter to which asset the stablecoin is pegged, it will maintain the same value as the asset. 

Price stability is one of the major characteristics of Stablecoins. If you are looking for a cryptocurrency asset that is not subject to market volatility like other asset classes in the market, then investing in a stablecoin may work best for you. Some investors are looking to store their real cash in digital form. Such requirements can also be met easily by investing in a stablecoin, since liquidating the stored digital assets can be much easier when compared to other cryptocurrency tokens. 

In some cases, these coins will also help you have a connecting bridge between traditional and digital assets. However, for these stablecoins to work properly, there should be an uninterrupted supply of collateral according to the rising demands. 

Top 5 Stablecoins by Market Capitalization 

In the section below, you will be able to find all the top 5 stablecoins according to market capitalization. All of these are widely active in the centralized & Decentralized Finance sector, and also relatively safer to invest in, with lucrative returns. You will be able to find out the total market capitalization of each of these stablecoins, the potential risks involved in them, and their key features. We have also tried to include brief information regarding the working mechanism of each coin for your basic understanding.

1. Tether USDT

As the name of this stablecoin suggests, it is pegged to the US dollar. Whenever you look at the price of the coin, it will be equated with the value of 1 USD. Tether has also got reserve assets so that they would be able to maintain the equivalency of their coin with the price of the fiat currency. Cash equivalents like U.S. Treasury bills or sometimes real cash and other investment commodities become their assets held in reserve. 

The working mechanism of Tether USDT is quite simple, which involves the release of new USDTs whenever a user deposits real US dollars to purchase the coins, and the burning of the coins whenever the user wants to redeem the coins, or in other words, liquidate them. 

The entire stablecoin industry is dominated by Tether USDT, since it has the largest trading volume and market capitalization. The current market capitalization of the token will be around $172.15 billion. This makes the stablecoin preferred by a lot of investors across the globe.

However, it is important to note that some reports that came out recently from CoinDCX say about the scrutiny that was held around Tether USDT to examine the transparency of their reserves. 

2. USD Coin (USDC)

Just like the Tether USDT, USDC is also pegged to a fiat currency at a rate of 1 US dollar. Short-term US treasury securities and US dollars are the collateral support for USDC. These are held under the responsibility of regulated financial institutions. Apart from this, different accounting firms would be assigned to conduct an audit on a monthly basis to always keep a surveillance on the reserves. 

USDC always makes it a point to keep up with all the regulatory protocols and maintain transparency in all its transactions. They are also quite uncompromising about preventing any sort of price deviations that may happen within their ecosystem. For this, they are currently depending on the services of various accounting firms and get regular attestations done by them. As per the recently available statistics, $74.13 billion is the market capitalization of USDC. 

No matter how much they emphasize safety, security, and transparency in transactions, since it exists in the vulnerable world of cryptocurrency tokens, you will not be able to simply let go of the risks involved. Stablecoins, including USDC, can still lose their peg, and an event from the history of the coin proves it. USDC’s peg was lost when its reserve was exposed to the Silicon Valley Bank in its phase of failure. 

3. Ethena USDe (USDE)

From the list of top 5 stablecoins, Ethena USDe (USDE) belongs to the category of synthetic stablecoins. The working mechanism of USDE involves a delta-hedging strategy using collateral like staked Ethereum. This is done in order to balance the price volatility of the coins. Staked Ethereum coins will serve for short positions in the derivatives market, so that they will be able to prevent any sort of price volatility that will affect their equivalency with the pegged fiat currency, that is, the US dollar in this case. 

$14.09 billion is the current market capitalization of USDE according to the latest statistics available. All the functionalities of USDE are completely independent of the intermediaries, such as banks. It is currently popular among cryptocurrency enthusiasts as the top decentralized exchanges stablecoin available in the market at the time. 

The profits that are generated through staking rewards are proportionately distributed to the stakers within the ecosystem, making it one of the most loved stablecoins by many investors out there. Positive funding from derivative positions is also a significant way through which the USDE network is able to reap profits in the system. 

Even if the features seem attractive, the same features can also act as a villain, especially in cases of volatile funding rates. The protocol may become unprofitable if the negative funding persists for an extended period. The delta hedging trades, which are characteristic of USDE, are completely dependent on the Ethena team, which may involve risks of transparency and can consequently lead to destabilization. Any mishaps with the third-party custodians and counter party can also lead to troubles with this stablecoin.

4. DAI 

DAI is a stablecoin with a decentralized working mechanism and is executed and supervised under a Decentralized Autonomous Organization (DAO). $5.36 B is the current market capitalization value of the coin. Here, the pegging is done with a lot of cryptocurrency assets. These assets are locked with the security of smart contracts on the Ethereum Blockchain. 

It is claimed to be more resistant to censorship, especially when compared to the stablecoins that are pegged to fiat currencies like US dollars. This can also increase the transparency in the transactions of the coin. 

The governing responsibility of this stablecoin is vested with a community called Marker DAO. They are also accountable for keeping the equivalence of the stablecoin with the pegged cryptocurrency by balancing the collateral proportions. 

Over-collateralization is one of the key features of DAI; however, if an unexpected bearish momentum in prices happens with the collateral, maintaining the peg of the stablecoin can be quite difficult. Thus, the dependency on the market value of the collateral asset can be a major risk with DAI.

In case of a sudden and unexpected downfall in the values, DAI will be backed up by stablecoins like USDC, which becomes the next risk in this stablecoin network. Any depegging with USDC will thus be reflected immediately with DAI coins too. There are also a lot of systemic risks involved with the coin, especially when it is decentralized. Even the intricate algorithmic systems can collapse, causing major risks. 

5. USD1 

This is also called World Liberty Financial USD as well as USD1. It is again pegged to the fiat currency, the US dollar. The popularity of this coin is primarily due to its association with the US president, Donald Trump. It has a current market capitalization of  $2.69 billion. 

Unlike some of the other stablecoins that we have discussed in this article before, this stablecoin works in a centralized mechanism under the company called World Liberty Financial, a company that is closely connected to the family of the president. US Treasuries, cash, and cash equivalents are some of the standby reserves of USD1. Customers who are looking for large-scale institutional and cross-border transactions are mostly interested in investing in this particular stablecoin. 

Adoption is quite mandatory and crucial when it comes to maintaining the peg value of the stablecoins. But these stablecoins are almost always under scrutiny and supervision on account of the political controversies surrounding the coin. This may end up in some regulatory hurdles, sometimes leading to destabilization. 

USD1 has this tendency to keep the composition of its reserve confidential, which can compromise the transparency of the stablecoin. Apart from this, the political ties of this coin and the potential influences are always a matter of concern when it comes to the risk cautions. 

Bottom Line 

That is everything you need to understand about stablecoins. The listed stablecoins are the top 5 in the market, and you may consider investing in them. From the detailed description given for each, you will be able to choose the one according to your preference and requirement. We believe that the concept of pegging, collateral management, and maintaining the equivalency are all clear to you, since they are all the key working mechanisms involved with stablecoins.