In cryptocurrency trading, the term “stablecoin” is frequently encountered, raising questions about its use in an environment where cryptocurrencies are known for their price fluctuations.

The primary characteristic of stablecoins is their backing by real-world assets, except for algorithmic stablecoins. This backing results in reduced price volatility compared to other cryptocurrencies, justifying the name “stablecoin.” Consequently, a notable portion of cryptocurrency investors views them as a dependable asset in times of market instability.

Consider a US dollar stablecoin as an example. When a company intends to issue 1 million USD stablecoins, it is required to deposit assets equivalent to 1 million US dollars within a custodian institution. This deposit is crucial to maintaining a 1:1 value ratio with the US dollar. Without this equivalence, the market may not acknowledge it, potentially leading to a decline in the coin’s value.

Generally, stablecoins are often pegged to specific fiat currencies or commodities like gold. This pegging is an attempt to bring stability to the highly fluctuating cryptocurrency landscape. It’s worth noting that not all stablecoins follow the same principles to achieve this goal. Based on the mechanisms they employ, stablecoins can be broadly categorized into 3 main types.

Fiat-backed stablecoins

The first category of stablecoins is fiat-backed stablecoins, such as USDT and USDC, and is by far the most popular. The daily trading volumes reached an astonishing $18.3 billion and $2.7 billion, respectively. These stablecoins are backed by reserves of traditional fiat currencies, such as the US dollar or the Euro.

To maintain their one-to-one peg to a currency, the stablecoin issuer ideally holds the currency in cash, or cash equivalents such as treasuries, which should match or exceed the circulating supply of the stablecoin.

Crypto-backed stablecoins

Next, we have crypto-backed stablecoins. As their name suggests, crypto-backed stablecoins originate from DeFi applications, and are backed by cryptocurrencies held as collateral.

However, due to the volatile nature of cryptocurrencies, crypto-backed stables typically require over-collateralization to a specific ratio to ensure stability.

For instance, a collateralization ratio requirement of 150% means that a user needs to deposit $150 worth of crypto to mint $100 of a stablecoin.

Examples of crypto-collateralized stablecoins include DAI, which is currently the largest crypto-backed stablecoin by market capitalization, or LUSD, which is 100% backed by ETH.

It’s worth mentioning that even though DAI was designed to be a decentralized stablecoin, its collateral includes a large percentage of USDC, USDP, and GUSD, which are centralized fiat-backed stablecoins, and even US treasuries.

Algorithmic stablecoins

The third category is algorithmic stablecoins, which are also meant to be decentralized in nature.

But unlike over-collateralized stablecoins, they may or may not actually be backed by anything.

Instead, they rely on algorithmic and incentive mechanisms to maintain their price stability.

However, historically, this mechanism has not been sustainable, since it’s dependent on consistent demand being there for the stablecoin, and once that disappears, they go into a so-called death spiral, where the mechanism collapses the stablecoin.

Basis Cash, Empty Set Dollar, Titan, and most infamously, Terra’s UST are some of the examples of failed algorithmic stablecoins.

These are the three main categories, but there are also other stablecoins that don’t fit neatly into them, like FRAX, which launched as the first partially algorithmic stablecoin, though a recent community vote has decided to shift the stablecoin to a fully crypto-collateralized model over time.

Meanwhile, some stablecoins peg their value to physical assets, like precious metals or other commodities, such as Paxos Gold and Tether Gold, which claim to hold physical gold in reserves.

Non-peg stablecoins

Finally, there are even non-peg stablecoins, like Rai, which are crypto-backed but do not have their value tied to any specific asset, and have their value fluctuate based on supply and demand.

If you’re wondering why all the different designs, it’s worth noting that, like the blockchain trilemma of security, decentralization, and scalability, stablecoins also face their own trilemma of stability, decentralization, and capital efficiency, whereby any stablecoin design typically has to sacrifice one aspect to achieve the other two.

To date, the pursuit of a stablecoin that successfully balances all three aspects is ongoing. There is considerable anticipation within the cryptocurrency community for the introduction of a stablecoin that can cater to a wider array of use cases.

LADT and NewPay Team Up to Provide Stablecoin Payment Solutions

NewPay, the sole payment platform in Laos with a third-party payment license, has formally entered into a strategic partnership and product development collaboration with the Lao National Digital Technology Group (LADT) to facilitate the use of the ASEAN USD (USDA) stablecoin, endorsed by the Association of Southeast Asian Nations (ASEAN).

In the foreseeable future, NewPay’s objective is to introduce more user-friendly blockchain-based cross-border payment solutions tailored for the ASEAN region. This initiative aligns with the ongoing trend of digital transformation within the ASEAN economy.