What are Stablecoins?
Stablecoins are a type of cryptocurrency designed to have a stable value over time, typically pegged to a fiat currency like the US dollar. Unlike other cryptocurrencies that can experience high volatility, stablecoins aim to maintain a consistent price. There are four main types of stablecoins: fiat-backed, commodity-backed, cryptocurrency-backed, and algorithmic stablecoins.
In this Knowledge Base, we will specifically focus on fiat-backed stablecoins such as USDC and USDT.
Native Stablecoins
Native stablecoins are issued on a specific blockchain and are designed for use within that blockchain’s ecosystem. They are seamlessly integrated into the blockchain’s infrastructure and are typically backed by reserves of the currency to which they are pegged. Often, these stablecoins are directly managed by the issuing entities, ensuring stability and confidence. For example, Circle issues native tokens on selected chains, such as USDC on Ethereum, which is directly managed by Circle, fully reserved, and always redeemable 1:1 for US dollars.
In contrast, non-natively issued stablecoins are created on one blockchain and then made accessible on other blockchains through interoperability solutions such as bridges.
Bridged Stablecoins
Bridged stablecoins are versions of a stablecoin that have been transferred from their original blockchain to another blockchain. For instance, bridge protocols may secure USDC from Ethereum within a smart contract or retain custody, and then mint a wrapped version of USDC on another blockchain until it is swapped back. This process allows the stablecoin to be used across different blockchains, increasing its utility and accessibility, such as for participation in DeFi ecosystems on different blockchains where the native stablecoins are not supported.
Why do we keep Bridged USDC/USDT listed separately from natively issued USDC/USDT?
We differentiate between bridged and natively issued USDC/USDT to highlight their distinct characteristics and risk profiles. Bridged stablecoins carry additional risks compared to their native counterparts, primarily due to the complexities involved in moving/bridging them across different blockchain ecosystems. A significant risk includes the potential for hacks or security breaches within the bridging infrastructure. Such incidents can lead to a loss of user confidence and significantly affect the stablecoin’s ability to maintain its peg to the underlying asset. This loss of confidence might result in a temporary de-pegging of the stablecoin’s price as users react negatively to the incident, as evidenced by the previous Horizon and Multichain bridge hacks.
If bridged and non-native stablecoins are not distinguished from native stablecoins, incidents affecting the bridged asset can distort the overall price data of the native asset, causing data inconsistency and inaccuracies. This is especially problematic if the exploited bridged asset holds significant weighted metrics such as volume, skewing the aggregation of the native asset prices. This can potentially mislead users about the true value of the native stablecoin and create unnecessary panic. Through separate listings, we are dedicated to ensuring that users receive accurate price information and can make informed decisions based on the specific characteristics and risks of each type of stablecoin.
We encourage all users to stay informed about the mechanisms and security measures behind their chosen stablecoins, whether native or bridged.
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