Wondering What the Safest Stablecoin Is? We've Got You

Wondering What the Safest Stablecoin Is? We've Got You

Tether is the most popular stablecoin, but it's risky. USDC and Dai are widely considered to be some of the safest stablecoins. Here's why.

Wondering What the Safest Stablecoin Is? We've Got You
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Published Dec 3, 2021Updated Jan 18, 2022

Crypto

Crypto

Global Markets

Global Markets

Technology

Technology

Stablecoins tout some pretty attractive benefits. As a cryptocurrency that's pegged to an external asset (and therefore stable), stablecoins are framed as the best of both worlds between traditional currency and crypto. 

People who invest in crypto like to convert a portion of their crypto into stablecoins when they need to avoid volatility. What's more, crypto banks offer extremely high stablecoin interest rates, so you can keep your savings there and earn around 200x what you'd earn on US dollars with a traditional bank. But is it safe?

The debate around the safety and actual stability of stablecoins is alive and well. If you're looking for the safest stablecoin, here's what you need to know.

Are stablecoins safe?

Stablecoins are considered safer than other cryptocurrencies, but determining whether or not a stablecoin is safe depends on how it's backed, the issuer, and the likelihood that future regulations will impact the stablecoin negatively.

Backing

The backing of any given stablecoin determines how much it's worth and thus how likely it is to lose value. Unlike other cryptocurrencies, which are notoriously volatile, stablecoins are tied to the value of an external asset to make them, well, stable. Stablecoins can be tied to a fiat currency, such as the US dollar, another cryptocurrency, such as Bitcoin, or a commodity, such as gold. In theory, reserves of that asset are then kept on hand by the issuer to back the stablecoin's value.

The safest stablecoins are coins backed by an external asset that's also considered safe. Many people consider stablecoins that are tied to the US dollar to be the safest stablecoins due to the relative strength of the USD. To increase the safety of a stablecoin, an issuer will keep reserves on hand of the external asset it's tied to. For that reason, stablecoins that are 100% backed by the asset they're pegged to are considered to be the safest.

Government regulations

The lack of regulations around stablecoins has made it easier for issuers to make false claims about their backing, which is a large part of what makes some of them potentially unsafe. However, this could change in the near future—and if it does, new regulations could impact the stability and value of some stablecoins.

Congress could pass measures requiring stablecoin issuers to adhere to similar regulations as banks, particularly when it comes to making claims about reserve assets. Issuers who refuse or are unable to meet any new regulatory requirements could see a crash in their stablecoins. That said, stablecoins that are able to meet regulatory requirements will likely become safer, more widely accepted, and more efficient.

Transparency

While a fiat-backed stablecoin that claims it's 100% backed by reserves of USD might be considered the safest stablecoin in theory, some issuers' claims about the backing of their stablecoins have been called into question. 

For example, Tether (USDT), the largest stablecoin, came under fire for that very reason. Back when it was still called Realcoin, the issuers claimed the stablecoin was backed 1-to-1 by the USD with reserves it kept on hand. These claims were never verified, and years later, an investigation by New York state Attorney General found that the issuer covered up the loss of $850 million, and their lawyer admitted that Tether was actually less than 75% backed. Further investigation found that at times there were no reserves whatsoever to back the value of Tether.

Is USDC safer than USDT?

While USDT has been through a number of lawsuits and investigations have shown it isn't actually fully backed by reserve assets, stablecoins like USD Coin (USDC) are issued by trustworthy organizations that have been more transparent. USD Coin (USDC)—also backed 1:1 by USD—is managed by the same people who run Coinbase, the second-largest crypto exchange by volume. USDC is also fully backed by reserves, and independent auditors have verified these reserves. For this reason, many people consider USDC to be the safest stablecoin.

coinbase
Coinbase

4.3

Crypto

Custodial stablecoins vs decentralized stablecoins

Stablecoins that are backed by fiat currency or commodities are considered centralized or custodial stablecoins. This is because they're tied to a centralized asset and need to be controlled by a custodian (typically the coin's issuer). The custodian regulates the coin's asset reserves to make sure it's properly collateralized. 

While being backed by fiat currency or commodities can offer additional protection and stability (after all, the dollar is more stable than Bitcoin), it also means these stablecoins aren't fully decentralized the way cryptocurrency is designed to be. Some investors see custodial stablecoins as less safe for this reason—when you purchase them, you're trusting the coin's custodian to properly manage its reserves and to avoid security breaches such as cyber-attacks.

On the other hand, stablecoins that are algorithmic or crypto-backed are fully decentralized, and many proponents of DeFi (decentralized finance) claim this makes them safer. For example, while popular stablecoin Dai (which is available on crypto exchange Kraken) is pegged to the USD, it's not backed by it. Instead, it's overcollateralized using Ethereum-based smart contracts and thus considered completely decentralized. There's no centralized organization controlling the coin, and the collateralization process is completely transparent because these coins use open-source algorithms.

kraken
Kraken

Crypto

This means that rather than relying on an issuer to audit itself, anyone can access and audit the algorithm to determine the stablecoin's safety and stability—that is, if you can understand it. In the end, the debate between whether custodial stablecoins or decentralized stablecoins are safer often comes down to whether you'd prefer to put your trust in a centralized organization of crypto experts (such as Coinbase with USDC) or your own ability to judge and analyze a given stablecoin.

What is the safest stablecoin in 2021?

Among the best stablecoins, USDC is often called out as the safest stablecoin. In terms of market capitalization, it's second only to Tether, which many crypto-enthusiasts no longer trust due to its lack of transparency and history of lawsuits. USDC, on the other hand, is issued by members of Coinbase, a trusted organization, and its asset reserves have been verified by a third party.

That said, some cryptocurrency investors who are serious about decentralization claim Dai is safer than USDC because they believe that not being controlled by a centralized issuer makes it less vulnerable to a crash or attack. And Dai is the most popular decentralized stablecoin, ranking fourth in terms of market cap.

Is bigger necessarily better? Do you trust a third party to control your money, or do you prefer to put your trust in an algorithm? In the end, the safest stablecoin depends on how you define safety and what you're looking for in a stablecoin.

Old fashioned...or really old fashioned?

While commodity-backed stablecoins are less popular than fiat-backed stablecoins, they're growing. Some people consider stablecoins backed by gold, such as PAX Gold (PAXG), to be safer than those backed by USD—because they consider gold to be a safer store of value than USD. Which would you put your trust in?

Old fashioned...or really old fashioned?

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