These crypto-currencies indexed to stable assets (like currencies) are used by millions of investors and play a central role in decentralized finance (DeFi) applications where some offer particularly enticing returns (sometimes up to 20% per year). Even institutional investors are seizing on them as they represent the ideal bridge between traditional finance and the crypto universe.
As a sign of the trend, the capitalization of stablecoins has grown by 548% since the beginning of 2021 to reach a global value of $188 billion, or 10% of the global crypto market. There is a huge variety of them, each distinguished by the stability of its price compared to the traditional currency it replicates, the nature of the reserve, the degree of decentralization of the system or its compliance.
In this report, you will discover a complete panorama of the sector, without forgetting the stablecoins euros which begin to break through despite the delay on their American equivalent which crush the market.
This type of stablecoin is administered by a company. The way it works is very simple to understand: the company issues tokens whose value is equal to the amount it holds in a reserve. Most of the time, a stablecoin is backed by cash placed in a bank account to guarantee its value.
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👉 USDT (Tether) - $83 billion
USDT is the oldest and most widely used stablecoin in the world. It was created in Hong Kong by the company Tether in 2014. "USDT has the best liquidity in the secondary market," Sam Bankman-Fried, founder of the FTX exchange platform, tells us. "Its volumes on exchanges and over-the-counter are huge, you can trade large amounts of it without much impact," he points out.
Its business model is based on a 0.1% commission charged each time a company requests the creation of new USDT units. So it will take $1 million plus $1000 in fees to get $1 million USDT. The cost is the same in the other direction (USDT to dollar).
Tether has been at the center of many controversies, particularly regarding its reserve. In 2021, the company agreed to pay $61 million to avoid prosecution in the United States. The company was accused of lying about what exactly was in its reserve. Contrary to the company's claim, the reserve was not fully secured by dollars between 2016 and 2018.
Even today, there is some criticism of the USDT reserve. In its latest audit report published in December 2021, Tether states that it is 84% cash and equivalents (government bonds, certificates of deposits, etc.), but also debt securities and cryptocurrencies. In this context, some decentralized finance (DeFi) protocols have chosen to limit the use of USDT. On Aave, for example, it is not possible to use it as collateral to borrow other cryptocurrencies.
Should we be concerned about Tether's solvency? "We've been regularly exchanging USDT for dollars without encountering any problems," explains Sam Bankman-Fried, adding, "We've spoken directly with the people and banks that work with Tether and we're pretty confident that they're in the clear."
- The most liquid
- Available on almost all exchanges
- Circulates on 8 blockchains
- Sensitive to regulation
- Lack of transparency
👉 USDC (Circle) - $51 billion
Created to respond to the "inadequacies" of the USDT, the USDC is intended to be much more secure. Its governance is provided by the two American giants Circle and Coinbase. It also benefits from the support of institutional players, including some Wall Street banks.
USDC is not only used for trading activities. Visa and Mastercard payment networks are currently experimenting with it as an intermediary between the traditional financial system and cryptocurrencies.
Its operation is more advantageous than the USDT: there are no fees when issuing or destroying tokens. Its process is also much faster. "USDC uses the SEN network of the US bank Silvergate, so you can credit transfers 24/7," explains Sam Bankman-Fried. "In comparison, USDT is dependent on bank opening hours. It can take hours or even a day to create or return USDT," he notes.
The USDC's reserve is composed solely of cash and short-dated US Treasury bills. "Even if its reserve is not 100% cash, the USDC is currently the best compromise between security and liquidity," explains Pascal Tallarida, creator of Jarvis Network, a protocol allowing the exchange of a multitude of stablecoins.
- Best compromise between liquidity and security
- The most adopted in decentralized finance
- Circulates on 8 blockchains
- Very centralized
- Sensitive toregulation
👉 BUSD and USDP (Paxos) - $18 and $0.9 billion
The BUSD is a stablecoin issued as a white label by the American company Paxos on behalf of the exchange platform Binance. Its capitalization is $18 billion. Paxos also issues USDP ($950 million in capitalization) and works in the same way: a token backed by a bank account with dollars on it and nothing else.
According to Pascal Tallarida, Paxos stablecoins are the safest in the industry: "There is nothing but dollars in the reserve and the product is very well audited.
- Safest reserve
- Partnerships with leading players
- Very centralized
- Very sensitive to regulation
- Less liquid than its competitors
WATCH OUT FOR FUTURE REGULATIONS 👋
Centralized stablecoins are favored by regulators, as it is possible for issuing companies to freeze the funds of an address in case of activities considered illegal. Nevertheless, their future is not necessarily rosy, especially in the European space: the draft regulation Markets in Crypto-Assets (MiCA) seeks to impose a status of "Crypto-Asset Service Provider" (the European equivalent of the status of service provider on digital assets) to all issuers of stablecoins.
According to Victor Charpiat, a specialist in financial regulation, "large issuers like Tether or Circle might be tempted not to comply with this regulation which would prevent them from being available in Europe."
Unlike centralized projects that depend on the security and reputation of the companies that issue them, decentralized stablecoins operate without the involvement of a central authority. They are protocols that allow any user to create or destroy stablecoins under certain conditions.
Their reserve is solely composed of cryptocurrencies and not cash. To deal with the risk of volatility, it is essential to over-collateralize the reserve. For example, you need to deposit $150 in ethers to generate $100 in stablecoins.
Most of the time, these systems provide a threshold for liquidating the cryptocurrencies placed in the reserve in case of a price drop so that the outstanding stablecoins retain their value.
👉 DAI (MakerDAO) - $9 billion
DAI is one of the oldest (2017) and most widely used decentralized stablecoins. Its reserve is mainly composed of USDC and ethers.
Its MakerDAO issuer protocol has gone through several shocks in recent years, including the financial crash of March 2020 (Covid crisis). The rapid and vertiginous fall of the ether price had led to a large series of liquidations, threatening its entire system. But it is still there, and the project's backers have never offered grants to use MakerDAO. Its growth is purely organic, which is quite rare in the industry.
Today, the majority of its reserve is backed by USDC to limit liquidation risk. This decentralized stablecoin is therefore mostly protected by a centralized stablecoin. And so is exposed to the risks of the latter.
- Historical resilience
- Organic growth
- Reserve mainly composed of USDC
- Only on Ethereum
👉 MAI (Mai.finance) - $300 million
Mai.finance (also known as QiDAO) is a protocol that follows the over-collateralized lending principle introduced by MakerDAO. This protocol differs from its predecessor in that it supports many more blockchains and issues its stablecoins from a wider range of cryptocurrencies. MAI is backed mostly by BTC and ETH.
- Support for most blockchains
- 9 cryptocurrencies available for collateral
- Has not yet been through a stress test
PIRACY RISKS 😱
Decentralized finance protocols can have flaws in their design. If one of them is exploited by a hacker, the funds in the pool are likely to be stolen.
Their designers intend to address the weakness of decentralized stablecoins, where a large part of the reserve remains unused to support over-collateralization. An example to understand the "problem": for 17 billion dollars locked in MakerDAO, only 11.5 billion IADs can be issued. The remaining 5.5 billion have no other use than to keep the system over-collateralized to avoid liquidations.
Algorithmic stablecoins are about maximizing the amount of capital raised, but this system has consequences for price stability (which can be a problem for a stablecoin).
👉 UST (Terra) - $19 billion
UST is a stablecoin dollar developed on the Terra blockchain. Its price stability relies on an arbitrage mechanism that consists of destroying or creating LUNA, Terra's token.
The third largest stablecoin on the market after only a year and a half of existence, its popularity is explained by the significant returns it provides when deposited in the Anchor lending protocol: 18% annually!
Although fully decentralized, the latter was close to bankruptcy following the rapid fall of the LUNA price in May 2021. Aware of this risk, the Luna Foundation Guard has acquired 11,700 bitcoins in recent months with the aim of strengthening the stability of the UST.
- Fully decentralized
- Available on many blockchains
- High liquidity
- Significant risk of a mismatch with the dollar
👉 FRAX (Frax.finance) - $2.6 billion
FRAX mixes a pool of "traditional" collateral, mostly USDC, with an algorithmic pool based on its FXS governance token. The latter is created or destroyed according to the FRAX stablecoin price so that the difference with the dollar price is always as close to zero as possible. It is presented as an answer to the UST and its large price variations against the dollar.
- Improved management of price anchoring
- Limited use cases
- Still relies heavily on the USDC
RISKS OF DE-ANCHORING 💸
The biggest risk of algorithmic stablecoins comes from the operation of the protocols themselves. Algorithmic stablecoins are notorious for having difficulty tracking the value of their underlying currency. Some, like Iron Finance's IRON or the FEI stablecoin, are infamous for losing their currency's peg and causing major disasters...
As you can see, stablecoins in dollars are crushing the market. According to the figures, they represent 99% of the volumes... And in euros? We start from far, but the projects exist. "There are many good and young projects around the single European currency," insists Victor Charpiat.
👉 EURT (Tether) - €249 million (centralized)
EURT is another stablecoin developed by the company Tether. Like its older sibling UDST, it is backed by a reserve that is supposed to hold the same value in cash and equivalents. It is important to note that Tether does not provide a detailed audit for this stablecoin that circulates on Ethereum.
- Better and better listed on exchanges
- Not very transparent
👉 EURS (Stasis) - EUR 129 million (centralized)
EURS is another centralized stablecoin available on the Ethereum blockchain. It differs from its competitor Tether in that it publishes regular audits of its reserve composition.
- Medium liquid
👉 EURL (Lugh) - 10 million euros (centralized)
The latest of the centralized euro stablecoins, EURL is mainly developed on the Tezos and Ethereum protocols by the French retail group Casino. Its reserve of 10 million euros is provided by Société Générale. While it was only dedicated to Coinhouse customers since its launch in March 2021, its issuer recently received the green light from the regulator to be used everywhere else. According to our information, it will soon be used by large companies that wish to offer NFTs to their customers.
- Very attentive to the regulations
- Supported by large traditional companies
- Present on Tezos and Ethereum
- Available on few marketplaces
👉 agEUR (Angle) - 73 million euros (decentralized)
Angle is an innovative French project that allows you to issue stablecoins in exchange for other cryptocurrencies (mainly USDC and DAI). The advantage of this formula is that it is not necessary to over-collateralize the reserve: to obtain an agEUR (the name of the stablecoin), you only provide the equivalent in euros.
Volatility risk is hedged by a futures platform based on the cryptocurrencies accepted by Angle. Traders are there to cover losses and ensure that the agEUR is maintained at parity with the euro. The system is complemented by a lending protocol in which other players can deposit cryptos in exchange for returns.
- Mix between stablecoin issuer and decentralized exchange
- Good liquidity
- Only on Ethereum
- Majority of the reserve in USDC
👉 PAR (Mimo Capital) - €12 million (decentralized)
Mimo Capital takes the over-collateralized lending principle from MakerDAO: users deposit a number of cryptocurrencies as collateral in order to issue a stablecoin from them.
Mimo differs from MakerDAO in several aspects: the issued stablecoins (PAR) are euros instead of dollars and the protocol runs on the Polygon and Fantom networks to avoid the high fees of Ethereum.
- Integration of Polygon and Fantom
- More decentralized than DAI
- Low liquidity
👉 jEUR (Jarvis) - 3.6 million euros (decentralized)
The jEUR is a euro stablecoin developed by Synthereum (Jarvis Network), a protocol that specializes in issuing stablecoins representing various traditional currencies.
Users can deposit USDC as collateral to issue jEUR. When these jEUR are sold, they are burned and the USDC are returned to the seller. Users can also provide cash to the protocol to receive the fees collected by the exchanges and the lending of the collateral.
- Integration on Ethereum, Polygon and BNB Chain
- Large number of exchangeable currencies
- Use exclusively for stablecoins
- Low capital value
THE UNCLASSIFIABLE PROJECT TO REMEMBER
👉 RAI (Reflexer.finance) - $51 million
The principle of Reflexer.finance is similar to that of MakerDAO: it is a protocol in which any user can place ether (ETH) as collateral to issue stablecoins. Unlike all the other stablecoins mentioned, the RAI does not follow the price of a particular traditional currency: its value constantly fluctuates around 3 dollars.
This is a smart choice, as it could save it from regulatory tightening. Since it is not named after a traditional currency and is not backed by the value of any of them, it could thus slip through the cracks.