The Rise of Stablecoins, Digital Dollars, and Achieving Stability in a Highly Volatile Market

By Archon


The growing demand for stablecoins has been relentless since early 2020, when the total market cap was still below $10 billion. Today, stablecoins have become a significant force within the cryptocurrency space and a very polarising topic, especially since all stablecoins together crossed a market capitalization of $130 billion in autumn 2021 – increasing their value more than tenfold in less than 24 months.

Total Stablecoin Supply 2021
Source: TheBlock, November 2021

Despite fulfilling a paradoxical role in the cryptocurrency universe – as stablecoins typically represent FIAT currencies, which are heavily scrutinized by most die-hard Bitcoin and cryptocurrency believers – they offer many advantages such as:

  • being less volatile compared to other cryptocurrencies like Bitcoin and Ether
  • being relatively safe to invest (when backed by real assets)
  • acting as base pairs for trading on most centralized and decentralized exchanges

Additionally, stablecoin transactions are much more efficient than transactions in FIAT money which still relies on the outdated and complex infrastructure of the traditional financial system. These advantages especially play out when it comes to cross-border payments.

These advantages and a general increased interest in cryptocurrencies and trading of digital assets, and the promise of earning highly competitive yield in the world of Decentralized Finance skyrocketed the demand for stablecoins in 2020 without any ending in sight.

Share of Total Stablecoin Supply 2021
Source: TheBlock, November 2021

The stablecoin market itself has seen a lot of disruption in recent years. Initially completely dominated by Tether (USDT), countless new stablecoins have been launched since 2018, representing different approaches to providing a stable currency on the blockchain. Generally, we can differentiate between the following types of stablecoins:

Centralized stablecoins backed by off-chain collateral:
USDT and USDC – the two biggest stablecoins – are both examples of off-chain-secured stablecoins. They are issued by a central entity and secured by off-chain deposits. In this way, the stablecoin maintains its peg to a FIAT currency, trusting that this entity will always consider tokens’ creation and redemption requests versus their deposits.

Decentralized stablecoins backed by on-chain collateral:
The decentralized counterparts of the first category are issued without permission by DeFi (Decentralized Finance) protocols, by users depositing high-quality collateral (e.g., ETH) to mint a decentralized stablecoin. The protocol typically enforces a substantial over-collateralization to ensure the backing even in case of a significant price drop of the assets used as collateral. The most prominent example is MakerDAO and its stablecoin DAI.

Algorithmic stablecoins:
Stablecoins of this third category aim to achieve a higher capital efficiency than over-collateralized stablecoins while still following the decentralized model. Algorithmic stablecoins accomplish this by dynamically controlling the supply and demand of the stablecoin through a protocol. The protocol acts as a “central bank” and increases supply when the token shows a deflationary tendency and, in turn, reduces it when the purchasing power of the stablecoin falls. The rules for this are embedded in a smart contract, and changing them is only possible through social consensus or more formal governance votes tied to a governance/seigniorage token.

The main problem that such stablecoins have to solve is how to build trust in the system. There also exist other variants like commodity-backed stablecoins and specific subcategories, and hybrid tokens, but we are leaving them aside for now. The dominance of the US dollar is in the crypto market sometimes even more apparent than in the traditional world, as the absolute majority of Stablecoins are pegged to it. Some stablecoins are pegged to the EUR or the Swiss franc, but their market capitalization and trading volume are minuscule in comparison. We have also witnessed the rise of non-FIAT-pegged stablecoins like FLOAT or OHM, but they have not reached relevant adoption as a stable medium of exchange yet.

It is also worth mentioning that the regulation of stablecoins has been a hot topic recently, especially in the United States. We can most likely expect tighter rules on their issuance in the coming months and years, pretty much at the same time as CBDCSs (Central Bank Digital Currencies) will become more mature. We will now dive deeper into some of the largest stablecoins in the market and
explain why DUSD is different in many ways.


$USDT Price $1.00
Market cap: $74,848,850,104
Trading volume: $55,392,580,258
Market cap rank: #4 (Stablecoins: #1)

Source: CoinGecko, 2021

Tether – or USDT – is currently the most dominant stablecoin with nearly $75 billion market capitalization, despite being one of the most scrutinized projects. Tether’s success is partly based on the fact that it has been the first cryptocurrency-based stablecoin of its kind, with a long history going back to 2014. Since then, USDT has been one of the favorite trading pairs for Bitcoin and many other digital assets across hundreds of centralized and decentralized exchanges.

Another reason for Tether’s success is that it exists on many different blockchains and has always been the project that has pushed for early expansion beyond Ethereum (or initially Bitcoin’s Omni layer, where the project started). Currently, USDT is available on the Omni, Liquid Protocol, Ethereum, EOS, Tron, Algorand, SLP, and OMG blockchains/layers. One noteworthy fact is that especially the availability on Tron has seen colossal traction due to the fast transaction speeds and low transaction cost – which at the same time have risen significantly on Ethereum’s main blockchain. Right now, the USDT supply on Tron is even larger than the supply on Ethereum.

Source: TheBlock, 2021

USDT is issued by Tether Limited, which is controlled by the owners of the crypto exchange Bitfinex. Both have received massive criticism from the community, journalists, and regulators, questioning the de facto backing of USDT with real dollars or equivalent reserves. USDT is a centralized, “dollar-backed” stablecoin, so its users need to trust the issuing entity that every dollar of USDT is backed accordingly and can be redeemed any time for “a real US dollar.”

After many years of back and forth things escalated in 2021 when the CFTC (Commodity Futures Trading Commission) ordered Tether to pay $41 million in penalty making untrue or misleading statements regarding the backing of USDT and when Tether and the New York attorney general’s office agreed to settle on a fine of $18 million regarding their ongoing legal dispute.

Also in March 2021, Tether released a breakdown of their reserves. This breakdown showed for the very first time that 75% of Tether’s reserves are backed by cash, cash equivalents, and other short-term deposits and commercial papers, with the latter taking the majority (65%).

Source: Financial Times, Tether, 2021


$USDC Price $1.00
Market cap: $34,589,096,268
Trading volume: $3,158,463,414
Market cap rank: #10 (Stablecoins: #2)

Source: CoinGecko, 2021

USDC is another centralized stablecoin, backed by off-chain collateral and the number two in the market after Tether. Its current growth shows clear ambition to become the number one; this resonates with many DeFi advocates who often find it much more trustworthy than USDT, due to periodic audits.

USDC follows the example of USDT regarding its multi-chain approach. Therefore USDC currently runs on the Ethereum, Stellar, Algorand, Solana, Tron, and Hedera Hashgraph blockchains, but the absolute majority of its supply resides on Ethereum. USD Coin (the official name for USDC) is managed by a consortium called Centre, which consists of heavyweights of the crypto industry, namely Circle, Coinbase, and Bitmain.


$DAI Price $1.00
Market cap: $8,475,370,035
Trading volume: $554,437,323
Market cap rank: #29 (Stablecoins: #3)

Source: CoinGecko, 2021

DAI is the fourth biggest stablecoin in the market after USDT, USDC and BUSD but follows a very different approach than its centralised competitors. It’s the result of one of the first projects in Decentralized Finance, MakerDAO, and therefore an example of a decentralized stablecoin backed by on-chain collateral and controlled by a single entity but rather a set of smart contracts on the Ethereum blockchain.

Originally, DAI (back then called SAI) was 100% backed by ETH which has been provided as collateral by borrowers who then could borrow DAI based on a collateralization ratio of 150% ($150 word in Ether allows to borrow 100 DAI). If the user’s collateral falls below this ratio, the underlying smart contracts automatically liquidate the loan.

DAI is trying to keep its peg to the US dollar rules of supply and demand. Suppose DAI’s price goes below the nominated value of 1 USD. In that case, the interest rates for MakerDAO’s loans increase, incentivizing customers to close them, consequently reducing the supply of DAI in the market and vice versa.

Source: Decrypt 2021

In 2019, MakerDAO introduced additional collateral to DAI (SAI tokens have been upgraded to Multi-Collateral DAI tokens) beyond Ether. Quickly, the share of Ether (ETH) as collateral shrank, and today, a significant part of DAI’s collateral consists of centrally controlled assets, such as USDC. Earlier this year, USDC even counted for  60% of the total collateral. This development led to the question of how decentralized DAI is nowadays.


$UST Price $1.01
Market cap: $5,293,400,309
Trading volume: $68,085,052
Market cap rank: #42 (Stablecoins: #5)

Source: CoinGecko, 2021

UST is only one of multiple FIAT-pegged stablecoins native to the Terra blockchain (there also exist EUT, KWT, CHT, etc.) but by far the biggest and currently the only relevant one. The Terra blockchain is a dual token system consisting of UST and LUNA, the reserve asset. The peg of UST is maintained by arbitrage, as arbitrageurs profit from price divergences. For example, if UST goes > $1 in value, LUNA is purchased and burned to mint UST at $1 and sold for its higher market price. If UST goes <$1 in value, UST is bought and exchanged for LUNA to a fixed price of $1 and consequently sold on the market; the excess profit is kept.

This activity leads to a contraction or expansion of LUNA supply, as LUNA will be burnt if UST goes above peg and the LUNA supply increases when UST is below peg. As we can see in the below chart, UST managed to keep its peg very well most of the time except for a significant drop during the market-wide drawdown in May 2021.

Still, algorithmic stablecoins are not yet battle-tested across multiple market cycles and have to be observed. But if they hold their promise as a stable and reliant digital asset, their advantages like capital efficiency, full decentralization, and permissionlessness could lead to further growth. What we can already say at this point is that economic utility (medium of exchange, trading pair, payments for real-world assets, capital for DeFi applications, etc.) is key to the resilience of algorithmic stablecoins. UST is not only available on the Terra blockchain but also has wrapped versions live on Ethereum, Binance Smart Chain and Solana.

TerraUSD to USD chart
Source: CoinMarketCap


$MIM Price $1.00
Market cap: $2,851,003,411
Trading volume: $139,173,492
Market cap rank: #69 (Stablecoins: #6)

Source: CoinGecko, 2021

Magic Internet Money or MIM has been a relatively new contender in the stablecoin market as it has only been launched in 2021 as part of the DeFi protocol Abracadabra.Money. Still, it has seen mind-boggling growth in autumn and reached a market capitalization of more than $2.5 billion, making it the sixth largest.

MIM is a decentralized stablecoin, not unlike DAI, as it is backed by on-chain collateral. The main difference is that MIM is backed by interest-bearing collateral (e.g., yeUSDC, an interest-bearing token representing a yield-farming position on Yearn Finance). Its use case is mainly centered around leveraged yield farming DeFi as Abacadabra.Money allows this within a few simple steps.

The accelerating demand for leverage in the recent bull market, a strong community, and a laser-focused multi-chain expansion strategy have helped to grow Magic Internet Money to become one of the biggest stablecoins in the market. MIM also quickly become the favorite stablecoin of many DeFi users and has closed partnerships with well-known DeFi platforms such as Yearn, Convex, Curve, and SushiSwap.

Digital Dollars (DUSD)

DigitalDollar DUSD

DUSD is a digital currency designed by Fluid Finance – a Swiss-based bank alternative for everyone that aims to combine the best of traditional banking and DeFi technology. Fluid Finance envisioned digital dollars (and its counterparts pegged to the Euro, Swiss Franc and British Pound) originally by accident as they were looking for an easy way to transition between fiat currencies and DeFi applications.

The team was not satisfied with the transparency and resilience of existing solutions and came up with a way to offer a 1:1 backed representation of what the Fluid users hold in their deposit accounts – called digital dollars. This has been done to address many of the problems of the stablecoins mentioned above to various degrees: centralization, unclear regulation, untransparent collateralization, volatility, slow speed and vulnerability to “bank runs.”

Following the mantra “Don’t trust, verify,” anyone will be able to verify the balance of the reserves backing DUSD on-chain, 24/7, and the smart contracts are coded so that it is impossible for there to be more DUSD coins than USD reserves.

Additionally, Fluid Finance guarantees a redemption for 1:1 USD, even in case of bankruptcy or if DUSD loses its peg on the crypto side. Users will be able to deposit traditional currencies in their Fluid account (such as USD, EUR, GPB or CHF) and mint DUSD up to the current USD value in their deposit account. DUSD can then be used in various DeFi applications, offering an instant CeFi-DeFi bridge.

Allowing users to be the mint and simultaneously guaranteeing a redemption for 1:1 into FIAT (as those holdings are insured) are unique properties of this solution. This redemption can be called anytime using the ”redeem” function in Fluid’s smart contract, leading to DUSD tokens being burned and the corresponding USD sent from the USD treasury account to the user’s personal account at Fluid Finance.

Despite Fluid Finance being a centralized company, they will outsource the governance of DUSD. DUSD is therefore following a hybrid model, combining off-chain collateral with the transparency of the blockchain and decentralization governance of a DAO.

Source: DeFi Bridge DAO Gitbook, 2021

The ambitions of this project are high, by trying to provide a new kind of stablecoin that allows to bridge between the traditional finance world and DeFi easily and still being backed by verifiable off-chain collateral.

Learn more:
Digital dollars- Fluid Finance SA
Introducing digital dollars.| by Fluid Finance | Fluid | Sep, 2021


By guest author & advisor Archon (twitter: @archon_0x)

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