In cryptocurrency trading, stablecoins are among the most commonly used tools. Whether buying, selling, or earning yields, stablecoins are indispensable. So what exactly are stablecoins? What types exist? What are their respective pros and cons?
Register on Binance now | Download the Binance app
What Are Stablecoins?
Stablecoins are cryptocurrencies whose prices are pegged to a fiat currency (typically the US dollar). One stablecoin generally equals $1, with minimal price fluctuation.
Stablecoins were created to solve the problem of extreme cryptocurrency price volatility, allowing users to "hold dollars" without leaving the crypto market. Think about it — without stablecoins, if you wanted to temporarily hedge, you'd have to convert your crypto to fiat and then withdraw from the exchange to your bank. The whole process is time-consuming and cumbersome. With stablecoins, it's a one-click conversion, your funds remain in the crypto ecosystem, and you can re-enter the market at any time.
Main Types of Stablecoins
1. Fiat-Collateralized
Backed by real US dollars or equivalent assets (such as US Treasury bonds, commercial paper, etc.) as reserves. For every stablecoin issued, an equivalent amount of reserve assets is deposited. This is the most intuitive and currently the largest category by market cap.
- USDT (Tether): The largest stablecoin by market cap, issued by Tether Limited. Daily trading volume frequently exceeds Bitcoin's. Available across multiple blockchains with the best liquidity
- USDC: Jointly issued by Circle and Coinbase, with strong compliance and high reserve transparency, undergoing regular audits
- BUSD: Co-issued by Binance and Paxos (gradually being phased out)
- FDUSD: First Digital USD, a next-generation stablecoin strongly supported by Binance. Trading FDUSD pairs on Binance is typically fee-free
2. Crypto-Collateralized
Stablecoins issued through over-collateralization with other cryptocurrencies. For example, generating $100 worth of stablecoin requires depositing over $150 in crypto assets as collateral.
- DAI: Issued by the MakerDAO protocol, generated through over-collateralization with ETH and other crypto assets
- Highly decentralized, not dependent on any company, entirely managed by smart contracts
- More complex mechanism, but proven stable through years of operation
- Even if Tether had issues, DAI would continue functioning normally
3. Algorithmic Stablecoins
Maintain price stability through algorithms and smart contracts, without actual asset backing, using supply-and-demand adjustment mechanisms to maintain the peg.
- Higher risk — the 2022 UST/LUNA collapse is a prime example, with tens of billions in market cap evaporating within days
- The market is currently cautious toward algorithmic stablecoins, with few new projects
- Theoretically the most decentralized, but practice has proven their fragility
Commonly Used Stablecoins on Binance
| Stablecoin | Features | Use Cases |
|---|---|---|
| USDT | Best liquidity, most trading pairs | Trading, transfers, C2C buy/sell |
| USDC | Strong compliance, transparent reserves | Savings, long-term holding, institutional use |
| FDUSD | Strongly supported by Binance, some pairs fee-free | Trading, Launchpool mining |
Uses of Stablecoins
- Trading medium: As an intermediary currency for buying and selling crypto — nearly all trading pairs are priced in stablecoins
- Hedging tool: Convert assets to stablecoins during market downturns to preserve value while waiting for better entry points
- Savings yields: Deposit into savings products to earn interest, with annualized returns typically between 2-8%, far exceeding bank deposits
- Cross-border transfers: Low-cost, fast cross-border remittances that arrive in minutes with fees typically under $1 (using the TRC20 network)
- Salary payments: Some Web3 companies use stablecoins for payroll, convenient for managing global team compensation
How to Choose a Stablecoin
For daily trading, USDT has the best liquidity and is the top choice. For long-term storage of larger stable asset amounts, consider diversifying between USDT and USDC to reduce single-issuer risk. If you primarily trade on Binance, FDUSD offers the benefit of fee-free trading.
Risk Reminder
While stablecoins are "stable," they're not completely risk-free. Whether issuers maintain adequate reserves (Tether's reserve transparency has long been questioned), regulatory policy changes (the US is advancing stablecoin legislation), and potential brief de-pegging under extreme market conditions are all risk factors to consider. In 2023, USDC briefly de-pegged to $0.87 due to the Silicon Valley Bank collapse. We recommend diversifying across different types of stablecoins — don't put all your eggs in one basket.