Stablecoins are cryptocurrencies designed to maintain a stable value, typically pegged to the US dollar. They’re essential tools for DeFi trading, providing stability in a volatile market.
Types of Stablecoins
Fiat-Backed: USDC and USDT are backed by reserves of dollars and treasury bills held by their issuers. They’re the most liquid and widely accepted.
Crypto-Backed: DAI is backed by overcollateralized crypto deposits. It’s more decentralized but has different risk characteristics.
Algorithmic: These use supply mechanisms to maintain peg. They’ve proven risky, as demonstrated by UST’s collapse.
Popular Stablecoins
- USDC – Issued by Circle, highly regulated, transparent reserves
- USDT – Largest by market cap, widest trading pair support
- DAI – Decentralized, crypto-collateralized, MakerDAO governed
- FRAX – Hybrid model combining collateral with algorithmic mechanisms
Using Stablecoins in DeFi
Stablecoins serve multiple purposes: preserving value during volatility, providing liquidity to trading pairs, earning yield through lending protocols, and facilitating fast, cheap transfers between platforms.