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ToggleStablecoin is an indispensable part of the current Crypto and Web3 ecosystem. Although it does not provide "x5 x10" profits like memecoin or altcoin, stablecoin is the lifeblood for exchanges, DeFi protocols, and blockchain payment activities. Understanding stablecoin will help newcomers manage capital effectively, reduce risks, and exploit smarter investment strategies. Join Allinstation in exploring what Stablecoin is? Classifying Stablecoins and listing the 5 largest Stablecoins in the market through the article below!
What is Stablecoin?
Stablecoin is a type of cryptocurrency with a stable value, typically pegged to a fixed asset such as the US dollar (USD), gold (XAU), or other asset baskets.
Why do we need Stablecoin?
- Preserve value during strong market fluctuations
- Transfer money quickly, at low cost, without intermediary banks
- Trade, mortgage, and liquidate in DeFi applications
- Easily convert to other assets in the Web3 economy
Formation and Development of Stablecoin in the Crypto Market
Phase 1: Emergence of "Stable Value" Demand (2014 – 2015)
From the moment Bitcoin began attracting attention (2012–2013), the crypto market witnessed extremely high price volatility. Investors and traders found it very difficult to "anchor" profits after each price surge, as there was no intermediate asset with stable value on the blockchain.
Problem: BTC trading was too risky due to high price volatility. No "anchor point" to convert between assets
Phase 2: Tether (USDT) Paves the Way for the Stablecoin Era (2014 – 2017)
In 2014, Tether (USDT), the first stablecoin in the market, was born under the name Realcoin, issued on the Bitcoin blockchain through the Omni Layer protocol. USDT was backed 1:1 by USD in bank accounts. It allowed trading of "digital dollars" on the blockchain. Became the central tool for CEX exchanges. Tether quickly dominated the market and became the most popular stablecoin, despite many controversies surrounding reserve transparency.
Read more: What is Tether? The Empire Behind the Largest Stablecoin in the Market - What's Special About USDT?
Phase 3: Explosion of Decentralized Stablecoin & DeFi (2018 – 2020)
As the DeFi (decentralized finance) movement began to develop strongly, the demand for decentralized stablecoins also increased. The emergence of DAI (MakerDAO – 2017):
- First decentralized stablecoin, backed by ETH
- Automatically maintained price through collateral & liquidation mechanism
- Became a "core financial tool" of DeFi
This period also saw the appearance of many stablecoins such as:
- USDC (Circle & Coinbase – 2018): More centralized and transparent than USDT
- BUSD (Binance – 2019): Partnered with Paxos, obtained NYDFS certification SUSD,
- LUSD: New model crypto-backed stablecoin
Phase 4: Algorithmic Crisis & Lessons from UST (2021 – 2022)
In the context of a strong bull market in 2021, algorithmic stablecoin became "trendy", with Terra's UST (LUNA) leading the way. However, in 2022, this ecosystem completely collapsed, causing tens of billions of dollars in market cap to "evaporate". Confidence in algorithmic stablecoin was severely affected.
This led to enormous consequences such as UST's collapse → triggering LUNA and many other DeFi platforms to collapse. Algorithmic stablecoin was seen as too risky and difficult to control. Global regulators began to pay attention to stablecoin
Stage 5: Stability, Sustainable Development, and Legal Compliance (2023 – Present)
After the UST shock, the market became cautious and shifted towards developing stablecoins in a safe, transparent, and legally supervised direction.
Notable trends:
- USDC, FDUSD, PYUSD grew strongly due to legal compliance
- Stablecoins with legal origins or bank sponsorship gradually gained dominance
- Paxos, Circle, First Digital… became "trusted intermediaries"
- Domestic Stablecoins: Many countries began experimenting with "nationalized" stablecoins like e-CNY (China), USDF (USA), JPYC (Japan)
Popular Stablecoins in the Market
Stablecoins can be classified based on their collateralization method. Here are the 3 main groups:
Fiat-backed Stablecoins
This is the most common type, backed 1:1 by cash or cash-equivalent assets (mainly USD, sometimes EUR, JPY...). Each issued stablecoin will have corresponding reserves in banks or trust funds.
- Advantages: High price stability, easy conversion to fiat
- Disadvantages: Centralized, dependent on issuing organization
- Examples: USDT (Tether), USDC (Circle), BUSD (Binance), GUSD (Gemini)
Crypto-collateralized Stablecoins
Mortgaged by other crypto assets like ETH, BTC, LDO,… typically using an "over-collateralization" mechanism to ensure safety. Meaning: to issue 1 USD stablecoin, users must mortgage more than 1 USD in crypto assets (usually 150% or more).
- Advantages: Decentralized, transparent
- Disadvantages: Easy to be liquidated during strong market declines
- Examples: DAI (MakerDAO), crvUSD (Curve), sUSD (Synthetix)
Algorithmic Stablecoin
Not backed by real assets but using algorithms to control supply and maintain price. When price exceeds $1, the system increases supply to reduce price; conversely, it reduces supply when price drops below $1.
- Advantages: Highly decentralized, no reserve assets required
- Disadvantages: Very easy to collapse if ecosystem loses trust
- Examples: FRAX (previously semi-algorithmic), AMPL, USDN, UST (Luna – collapsed in 2022)
When users want to create DAI, they must mortgage a large amount of crypto with a value greater than the loan to ensure safety, for example: to mint 100 DAI, users may need to mortgage ETH worth 150 USD. Additionally, MakerDAO has also implemented a new mechanism to use Real World Assets (RWA) such as government bonds or encoded corporate assets to provide additional liquidity for DAI. DAI maintains price stability through an automatic supply-demand balancing system, liquidating assets when risks occur, helping to maintain a decentralized and sustainable 1:1 peg with USD.
First Digital USD (FDUSD)
FDUSD is a new emerging stablecoin issued by First Digital Trust, an asset management organization based in Hong Kong. FDUSD is 100% backed by USD and cash equivalent assets, stored in banks supervised by financial authorities in Asia.
A strength of FDUSD is their commitment to publicly report backing periodically and operate within a clear legal framework. This factor helped the stablecoin quickly receive strong support from Binance, the world's largest exchange after BUSD was discontinued. FDUSD is therefore seen as the unofficial "successor" of BUSD, with supply growing rapidly due to high demand in the BNB Chain ecosystem and Binance exchange.
Pax Dollar (USDP)
USDP is a stablecoin issued by Paxos Trust Company, a financial organization licensed by the New York State Department of Financial Services (NYDFS). This is one of the stablecoins with the strictest legal compliance standards.
The entire USDP supply is fully backed by cash and US Treasury bills, stored in US banks insured by FDIC. Paxos also conducts monthly audits and public reports to ensure the transparency of this stablecoin.
Additionally, Paxos previously collaborated with Binance to issue BUSD before it was discontinued due to legal pressure, and is currently collaborating with PayPal on a private stablecoin project, PayPal USD (PYUSD), using Paxos's own technology and backing infrastructure.
Summary
Stablecoin is not simply a "stable digital currency", but also the operating platform of the entire Web3 economy. From Tether to UST, from DAI to FDUSD, the journey of stablecoin reflects the maturity of the crypto market from a "wild land" to a financial ecosystem gradually approaching legal compliance and practical use.
Hope this article has been helpful for Allinstation's newcomers!
