Stablecoins are a category of cryptocurrency whose price is pegged to fiat currency (usually the US dollar). The design goal of one stablecoin is to always equal one dollar. Stablecoins solve the problem of extreme price volatility in crypto and serve as a crucial bridge connecting traditional finance and the crypto world. You can use stablecoins for trading after registering on Binance.
Why Are Stablecoins Needed?
Cryptocurrency prices are extremely volatile — a 10% swing in Bitcoin within a single day is common. This volatility makes crypto impractical as a daily payment tool or store of value. Stablecoins were created to solve these problems:
- Medium of exchange: Serves as the "dollar" in the crypto market, facilitating pricing and settlement
- Safe haven: Convert assets to stablecoins when the market drops to preserve value
- Cross-border transfers: Faster and cheaper than traditional bank wire transfers
- DeFi foundation: The core asset in lending, yield farming, and other DeFi activities
- Fiat gateway: A bridge connecting the crypto world and traditional finance
Main Types of Stablecoins
Fiat-Collateralized
Issued by centralized institutions, with every stablecoin backed by equivalent fiat currency or equivalent assets as reserves.
- USDT (Tether): The largest stablecoin by market cap, backed by US Treasury bonds, cash, and more
- USDC (Circle): The most compliance-focused, backed primarily by US Treasury bonds and bank deposits
- BUSD: Originally issued by Binance and Paxos, now discontinued for new minting
Pros: Simple mechanism, good stability Cons: Centralized, requires trust in the issuer
Crypto-Collateralized
Uses cryptocurrency (such as ETH) as collateral, issued through smart contracts. Requires over-collateralization to ensure stability.
- DAI (MakerDAO): The most well-known decentralized stablecoin, generated by over-collateralizing ETH and other assets
- LUSD (Liquity): A decentralized stablecoin that only accepts ETH as collateral
Pros: Decentralized, transparent, censorship-resistant Cons: Low capital efficiency (requires over-collateralization), may depeg under extreme conditions
Algorithmic Stablecoins
Maintain price stability through algorithms and market incentive mechanisms, with no physical collateral required.
- FRAX: A hybrid model combining partial algorithmic and partial collateral mechanisms
- UST (collapsed): Once the largest algorithmic stablecoin, collapsed in May 2022 and went to zero
Pros: High capital efficiency, fully decentralized Cons: Stability mechanism may fail under extreme conditions (e.g., UST's "death spiral")
Mainstream Stablecoin Comparison
| Stablecoin | Type | Market Cap | Transparency | Decentralization |
|---|---|---|---|---|
| USDT | Fiat-collateralized | Largest | Moderate | Low |
| USDC | Fiat-collateralized | Second | High | Low |
| DAI | Crypto-collateralized | Third | High | High |
| FRAX | Hybrid | Medium | High | Medium |
Use Cases for Stablecoins
- Crypto trading: Nearly all trading pairs have a stablecoin version (e.g., BTC/USDT)
- DeFi lending: Deposit stablecoins to earn interest, or borrow stablecoins
- Liquidity provision: Stablecoin trading pairs have the lowest impermanent loss in liquidity pools
- Salary payments: Some Web3 companies pay salaries in stablecoins
- International remittances: TRC-20 USDT transfers cost almost nothing
- Savings: In countries with severe inflation, stablecoins are a tool for preserving value
Lessons from the UST Collapse
In May 2022, the algorithmic stablecoin UST (TerraUSD) depegged and ultimately went to zero, causing approximately $40 billion in losses. The lessons from this event include:
- Algorithmic stablecoin mechanisms can fail completely under extreme conditions
- Once a "death spiral" starts, it is nearly irreversible
- High yields (Anchor Protocol's 20% APY) often signal high risk
- Do not put a large amount of assets in a single stablecoin
Safety Reminders
When using stablecoins, keep the following safety considerations in mind:
- Diversify your holdings: Don't put all your stable assets in one stablecoin; spread across USDT + USDC + DAI
- Stay away from algorithmic stablecoins: Unless you fully understand their mechanisms, it's not advisable to hold large amounts of pure algorithmic stablecoins
- Pay attention to network types: Make sure you select the correct blockchain network when transferring stablecoins
- Verify contract addresses: When trading on DEXs, confirm you're using the official contract address to avoid counterfeit stablecoins
- Follow regulatory developments: Stablecoin regulations are tightening globally, which may affect the use of specific stablecoins
- Don't chase ultra-high yields: A "risk-free" APY for stablecoins is typically 2-8%; projects offering much higher returns carry significant risk. You can download the Binance app, iPhone users can refer to the iOS installation guide to manage stablecoin earnings on a reputable platform
Are Stablecoins Really Stable?
Most of the time, yes. However, deviations can occur under extreme circumstances. Both USDT and USDC have experienced minor depegging events in the past but recovered quickly. UST, on the other hand, permanently depegged and went to zero, demonstrating the vast risk differences between stablecoin types.
Can You Earn Yield by Holding Stablecoins?
Not by simply holding them. However, you can earn yield through DeFi lending platforms (like Aave) or exchange wealth management products. Mainstream stablecoin lending APY is typically 2-8%.
Could Stablecoins Be Banned?
Different countries have different attitudes toward stablecoin regulation. The EU's MiCA regulation requires stablecoin issuers to meet reserve requirements. The US is also advancing stablecoin legislation. A complete ban is unlikely, but regulations will become stricter.
Which Is Safer — DAI or USDT?
They carry different risks. USDT relies on the credit and reserves of the Tether company; its risk lies in centralization. DAI relies on smart contracts and over-collateralization mechanisms; its risks include liquidation during extreme markets and potential technical vulnerabilities. Diversified holding is the best strategy.
Do Stablecoins Threaten the Dollar's Status?
Interestingly, stablecoins have actually strengthened the dollar's global influence — they allow anyone to hold and use "digital dollars" without geographic restrictions.