Blog

Sep 08

2020

Stablecoins

What is a stablecoin?

A stablecoin is a type of cryptocurrency that is designed to maintain a stable value. It does not fluctuate in price as much as other cryptocurrencies i.e, it is characterised by minimal volatility. 

How does a stablecoin work? 

The price of a stablecoin is usually pegged to a fiat currency like Dollar, Euro or Japanese yen. Most of the popular stablecoins maintain their price because they are backed with reserves of fiat currency. In other words, the entity that is creating the stablecoin guarantees 1:1 redemption of the stablecoin in exchange for the underlying currency, although this process usually comes with a fee. There are exceptions, however – DAI, for example, uses a completely different model and maintains a price close to $1 by using a system of smart contracts and ETH as collateral. We will explain the different types of Stablecoins and how they work shortly. 

Why are stablecoins important?

The most prominent importance of stablecoins is stability and how it helps cryptocurrency traders to hedge against volatility. Stablecoins — most notably Tether (USDT) — is a   popular asset among crypto traders who want to place their funds in dollars during market downturns so they can avoid crypto price volatility when the market is moving against them. 

Types of Stablecoins

Here’s a quick breakdown of different types of Stablecoins that are currently available in the market. 

There are three categories of Stablecoins namely;

  1. Fiat currency-backed 

  2. Asset-backed

  3. Cryptocurrency-collateralized stablecoin

  4. Non-collateralized stablecoin

Examples of Fiat currency-backed Stablecoin are the US dollar-pegged coins such as Tether (USDT), Boundlesspay Coin (BPAY), USD Coin (USDC), True USD (TUSD), and the Gemini Dollar (GUSD). Both USDT and BPAY coins are listed on Bitfxt.com.

An example of the Asset-backed stablecoin is the gold-pegged digital currency Digix Gold Token (DGX), which enables holders to invest in gold in a tokenized format. The price of one DGX token on the Ethereum blockchain is pegged to one gram of gold, which is held in a vault in Singapore.

Crypto-collateralized stablecoins are backed by other cryptocurrencies. The most notable crypto-collateralized stablecoin is Maker’s Dai (DAI). Dai is a decentralized, crypto-backed stablecoin that holds its value through the use of smart contracts that act in response to changes in market dynamics by buying and selling pooled digital assets such as ETH and MKR.

Non-collateralized stablecoins, also known as algorithmic stablecoins, are digital currencies that increase and reduce their coin supply automatically through the use of algorithms to ensure that their value remains stable. Two examples of non-collateralized stablecoin projects include Ampleforth and Kowala.

 

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