Introduction to Stablecoins
What Are Stablecoins?
Stablecoins are digital assets designed to maintain a stable value relative to a reference asset, such as a fiat currency.
For instance, a dollar-denominated stablecoin might have an underlying, redeemable collateral basket that fully reserves $1 worth of collateral for every stablecoin issued. As a result, the stablecoin should be valued at a market price at or very close to $1.
Over 99% of stablecoins track the US dollar, and collectively they hold enough US Treasury bills to rank as the 12th-largest sovereign debt holder globally.
Definitions
Over-collateralization: The practice where a borrower provides collateral with a value exceeding the amount borrowed.
Redeemability: The ability to exchange your stablecoin back for the underlying asset that it represents.
Types of Stablecoins
1. Fiat-Backed Stablecoins
These maintain reserves of fiat currency, like US dollars, as collateral. Issuers hold cash and/or cash-like instruments, such as U.S. Treasuries, and issue stablecoins at a 1:1 ratio. The reserves are kept by independent custodians and regularly audited.
Tether (USDT) and Circle (USDC) are popular examples backed by US dollar-denominated reserves. New models of Fiat-backed stablecoins, such as Noble Dollar (USDN), aim to pass through a portion of the underlying yield from the collateral reserve.
2. Crypto-Backed Stablecoins
These are backed by other cryptocurrencies but require over-collateralization due to crypto's volatility. To issue $1 million in stablecoins, you may need $1.5 million worth of cryptocurrency reserves as a buffer against price drops.
Sky's USDS is referenced to the dollar but backed by a basket of cryptocurrencies worth about 147% of the USDS in circulation.
3. Algorithmic Stablecoins
These control their value through algorithms that adjust the token supply rather than holding reserve assets. When the price goes above $1, the algorithm creates new tokens to increase supply, and when the price goes below $1, supply is lowered algorithmically.
Relative to its counterparts, algorithmic stablecoins are arguably the category with the highest risk of loss. The TerraUSD (UST) collapse in May 2022 is illustrative - its market price dropped over 60% when the underlying collateral token crashed 80% overnight.
Type | Collateral | Peg Mechanism | Capital Efficiency | Examples | Notes |
|---|---|---|---|---|---|
Fiat-Backed | Cash, cash equivalents | Redeemable 1:1 with Fiat | 1:1 | USDC, USDT | Most widely adopted. Reserves are custodied and often audited. |
Crypto-Backed | Over-collateralized cryptocurrencies | Liquidation + over-collateralization | Less than 1 | USDS | Value is maintained via smart contracts, risk from volatile collateral. |
Algorithmic | No collateral | Algorithm adjusts supply dynamically | High (no collateral needed) | AMPL | High-risk. Market incentives replace traditional reserves. |
Noble: Purpose Built for Stablecoin Issuance
Noble is an application-specific blockchain built for stablecoin issuance, serving as a trusted infrastructure partner for leading stablecoin issuers, including Circle (USDC), Ondo Finance (USDY), Monerium (EURe), and Hashnote (USYC).
In March this year, Noble launched its stablecoin, Noble Dollar (USDN). USDN is a yield-bearing stablecoin, fully backed by short-term U.S. Treasury Bills, that gives developers and end users full control over the underlying yield (4.15% as of writing).
So far, Noble has facilitated:
$17B+ in total volume
$602M in USDC issuance
$100M USDN circulating supply in 87 days since launch
$1M+ yield paid out to nearly 30K holders of USDN
10.5K Average Monthly Active Users
$330M+ in total swap volume (USDC <-> USDN swaps)
