Stablecoins are a special type of cryptocurrency designed to maintain price stability. Unlike other cryptocurrencies like Bitcoin and Ethereum, which have significant price volatility, the value of stablecoins is usually pegged to one or a basket of relatively stable assets, such as:
1. Fiat currency: The most common are those pegged to the US dollar (such as USDT, USDC, BUSD), with stablecoins also pegged to the euro, offshore yuan (such as CNHC), yen, and others. One stablecoin should theoretically equal one unit of the pegged currency.
2. Commodities: Such as gold (e.g., PAXG).
3. Other cryptocurrencies: Maintain value stability through algorithms or over-collateralization of other cryptocurrencies (like DAOs).
4. Algorithm: Maintains price stability by automatically adjusting market supply and demand through smart contracts and algorithmic mechanisms (many of these stablecoins have historically failed, such as UST).
Core goals of stablecoins:
Reducing volatility: Provides a relatively stable value store and medium of exchange within the cryptocurrency realm.
Connecting traditional finance with the crypto world: Acts as a 'bridge' for fiat currency to enter the cryptocurrency ecosystem (such as exchanges), and as an 'export' to convert crypto asset value back to fiat currency.
Facilitating transactions and payments: Plays a role in scenarios where price stability is needed (such as daily payments, cross-border remittances, DeFi lending, and transaction settlements).
Main types of stablecoins (by collateral/support mechanism):
1. Fiat-backed (centralized):
Principle: The issuer holds an equivalent amount of fiat currency (such as USD) as reserves, users can receive corresponding amounts of stablecoins by depositing fiat currency, and upon redemption, the stablecoins are destroyed to retrieve fiat currency.
Representatives: USDT (Tether), USDC (Circle), BUSD (Binance & Paxos), TUSD (TrueUSD), CNHC (offshore yuan stablecoin on Stellar) etc.
Advantages: Simple concept, typically better stability.
Risks: Centralized risk (relying on the credit, transparency, and compliance of the issuing institution, requiring trust that it actually holds sufficient reserves and allows redemption), audit risk, regulatory risk.
2. Crypto asset-collateralized (usually decentralized):
Principle: Users over-collateralize other cryptocurrencies (e.g., ETH) (collateral value > borrowed stablecoin value) in smart contracts to borrow stablecoins (like DAOs). If the value of the collateral drops close to the stablecoin debt level, it may be automatically liquidated to maintain system stability.
Representatives: DAI (issued by MakerDAO protocol, primarily collateralized by ETH and other crypto assets).
Advantages: Decentralized, higher transparency (can be checked on-chain), stronger resistance to censorship.
Risks: Volatility risk of collateral (if the price of the pledged cryptocurrency crashes, it may lead to large-scale liquidations or even system collapse), smart contract risk, high complexity.
3. Algorithmic stablecoins (decentralized, high risk):
Principle: Does not rely on or minimally relies on physical or crypto asset collateral. Primarily depends on complex algorithms and smart contracts to maintain price stability by automatically adjusting the supply of stablecoins in the market (burning or minting) and the mechanisms with associated tokens (usually high volatility governance tokens).
Representatives (historical): UST (TerraUSD - collapsed), Basis Cash, Empty Set Dollar (ESD), etc. (Note: The collapse of UST is a significant setback in the field of algorithmic stablecoins).
Advantages: Theoretically the highest capital efficiency, fully decentralized.
Risks: Extremely high risk, complex and fragile mechanisms, prone to 'death spiral' (when the stablecoin decouples, issuing more tokens to attempt to restore the peg may exacerbate sell-offs, leading to total collapse), lack of substantial asset backing, and a high historical failure rate.
Why are stablecoins important?
1. Medium of exchange: In cryptocurrency exchanges, stablecoins are the primary trading pair benchmark, avoiding frequent conversions between fiat currency and highly volatile cryptocurrencies.
2. Value storage: During severe fluctuations in the crypto market, investors can temporarily convert assets into stablecoins to preserve value without completely exiting to fiat currency.
3. DeFi foundation: Core infrastructure for decentralized finance, used for lending, as the underlying asset for liquidity pools, earning interest, and as collateral for derivatives, etc.
4. Cross-border payments and remittances: Provides a faster and cheaper way to transfer money across borders than traditional banks.
5. Daily payments: Provides a price-stable option for merchants to accept cryptocurrency payments.
Key risks:
Under-collateralization/lack of reserve transparency: The biggest concern for fiat-backed stablecoins is whether the issuer truly holds sufficient and high-quality reserve assets.
Redemption risk: If a large number of users request to redeem fiat currency simultaneously, the issuer may not be able to meet the demand.
Regulatory risk: Global regulatory agencies are highly focused on stablecoins, and future regulatory policies may have significant impacts (such as restrictions on issuance, licensing requirements, increased reserve disclosures, etc.).
Decoupling risk: Any type of stablecoin may temporarily or permanently lose its peg to the asset due to extreme market conditions, crises of trust, mechanism flaws, or attacks (e.g., dropping to $0.95 or lower).
Centralized risk: Fiat-backed stablecoins heavily rely on the integrity and operational capability of the centralized issuer.
Smart contract risk: For crypto collateralized and algorithmic types, code vulnerabilities may lead to loss of funds.
Systemic risk: If a large-scale stablecoin (such as USDT) encounters issues, it may trigger a chain reaction throughout the entire cryptocurrency market.
Summary:
Stablecoins are an indispensable component of the cryptocurrency ecosystem, providing much-needed price stability and utility for this highly volatile field by anchoring to relatively stable assets (mainly fiat currencies). They play a key role in transactions, payments, DeFi, and more. However, different types of stablecoins (fiat-backed, crypto collateralized, algorithmic) have distinctly different operational mechanisms and risk characteristics, with centralized risk (fiat-backed) and mechanism vulnerability risk (algorithmic) needing particular attention. Users must fully understand the supporting mechanisms and potential risks behind stablecoins when holding and using them.