Evolution of Stablecoins

What Are Stablecoins

Stablecoin is a cryptocurrency designed to maintain price stability by being backed by reserve assets like the U.S. dollar or gold, making it less susceptible to market fluctuations.

The concept of stablecoins first appeared in the 2012 Mastercoin documentation, but it gained traction in 2015 when Tether Limited introduced the first stablecoin.

Due to the high volatility of cryptocurrencies, they are often impractical for everyday use. Stablecoins, however, offer a solution by minimizing inflation risks, making them more viable for widespread use.

Stablecoins could even serve as a reserve currency for nations with high inflation, promoting global financial stability.

The primary goal of stablecoins (like, for instance, USDT and USDC) is to combine the benefits of cryptocurrency with the stability of traditional banking systems.

Since stablecoins are backed by tangible assets, they are more appealing as a medium of exchange and, crucially, as a store of value, increasing their potential to replace fiat currencies.

Multi-stablecoins and Risk Diversification

Multi-stablecoins examples: USD3, sDAI

Multi-stablecoins are assets that are a basket of several stablecoins (e.g. USD3 may include USDT, USDC and DAI).

This concept aims to reduce the risks associated with each individual stablecoin. Multi-stablecoins utilize fragmentation to diversify counterparty risk, exchange rate stability, and liquidity.

Multi-stablecoins benefits:

• Stability

Reduced likelihood of losing a dollar peg as risk is spread across multiple assets

• Flexibility

Ability to automatically rebalance based on market conditions.

• Capital efficiency

Such stablecoins can be used as collateral in DeFi protocols, providing increased protection against depreciation.

Synthetic Assets and Supercharged Stablecoins

Supercharged stablecoins examples: sDAI, sFRAX, sUSDe

Synthetic steblecoins, such as sDAI or sFRAX, are derivative assets that are created from the underlying steblecoins and can be used in a variety of financial strategies.

For example, sDAI is backed not only by the DAI itself, but also by other assets, allowing to create more complex risk and liquidity management strategies.

Supercharged stablecoins features:

• Programmability

Ability to integrate with various DeFi protocols, such as Aave or Compound, to create leveraged strategies.

• Leverage and hedging

Synthetic versions of stablecoins can be used to create credit derivatives or hedge risk through margin trading mechanisms.

• Reduced transaction costs

Since synthetic stablecoins are often issued within the same platform, their use in the ecosystem minimizes the costof moving funds.

Algorithmic and Semi-algorithmic Stablecoins

Examples: FRAX, GHO, USDD

Algorithmic stablecoins use software algorithms to maintain price stability. FRAX, for example, combines partial fiat backing with algorithmic mechanisms.

Semi-algorithmic stablecoins combine traditional asset collateralization with dynamic algorithms that automatically adjust the supply of stablecoins based on market demand.

Key features of algorithmic and semi-algorithmic stablecoins:

• Decentralization

The absence of a central issuer reduces the risks associated with regulators and centralization of asset management.

• Flexibility and scalability

Algorithms can automatically adapt to market conditions, adjusting supply and maintaining price stability.

• Resilience to external shocks

Algorithmic stablecoins can use a variety of stabilization mechanisms, such as arbitrage opportunities, token burning, or adding collateral.

Debt Stablecoins and Dynamic Risk Management

Debt stablecoins examples: crvUSD, deUSD, Iron Banks stablecoins

Debt-based stablecoins are issued based on collateralized debt obligations. For example, crvUSD, created by Curve Finance, is built around a debt collateral model with automated risk management.

Liquidation and refinancing mechanisms play a key role in these stablecoins to help maintain stability even in high volatility environments.

Examples of approaches:

• Automatic liquidations

Protocols use automatic triggers to sell collateral in the event of a price drop, which helps to maintain an appropriate level of collateral.

• Collateral refinancing

Systems automatically recalculate collateral ratios and recalculate collateral if market conditions change dramatically.

• Flexible asset utilization

Ability to use a variety of collateral types, including LP-tokens, synthetic assets and other stablecoins.

Programmable Stablecoins

Programmable stablecoins examples: GHO, deUSD

Programmable stablecoins, such as Aave's GHO, provide users with the ability to customize and integrate with DeFi protocols.

This creates opportunities to automate complex financial strategies such as lending, arbitrage, and liquidity management.

Benefits of programmable stablecoins:

• Integration with DeFi

Ability to interface with protocols for lending, arbitrage and revenue generation.

• Issuance flexibility

Users can issue stablecoins using collateral in the form of various assets, including cryptocurrencies and NFTs.

• Process automation

Ability to create smart contracts that automate liquidity and risk management processes.

Transparent and Adjustable Stablecoins

Examples: FDUSD, PYUSD

Stablecoins such as PayPal's PYUSD and FDUSD are focused on regulatory compliance and creating trusted relationships with institutional and traditional financial participants.

These stablecoins are fully backed by reserves and undergo regular audits to reduce counterparty risk and improve transparency.

Features of transparent and adjustable stablecoins:

• Regulatory compliance

Fully compliant with legal regulations and requirements, making them more reliable for large financial institutions.

• Audit and transparency

Regular reserve audits allow users to assure themselves of the stability and security of the stablecoin.

• Ease of integration

Such stablecoins can be easily integrated into traditional financial systems, making them easier to use and adopt.

Experimental Reservation Stablecoins

Examples: USD0, USR

These stablecoins seek to find new ways to stabilize that go beyond traditional assets. For example, USD0 can use digital energy saving certificates as collateral, linking the cryptocurrency market to environmental initiatives.

Innovative approaches:

• Unusual forms of collateral

Using non-financial assets such as energy, data or digital certificates creates new opportunities for sustainability.

• Supporting sustainability

Linking stablecoins to sustainability-oriented assets can incentivize the transition to a greener economy.

• Adaptation to new markets

It is possible to apply such stablecoins in niche segments, such as for settlement in green projects or low-cost cross-border transfers.

Users can get stablecoins for fiat or crypto on SimpleSwap.

Summary

Today, stablecoins are evolving rapidly, reflecting the growing need for sustainable, flexible and innovative digital assets.

Their diversity - from multi-stablecoins to algorithmic models and programmable stablecoins - offers different approaches to solving financial challenges, optimizing risk and improving interactions with traditional financial systems.

Stablecoins are becoming not just a medium of exchange, but a full-fledged financial instrument capable of changing the global economic landscape.