Stablecoin has the potential to unite financial systems across the globe with the aid of technology. Stablecoins are cryptocurrencies that commence the worth of a fiat currency and also maintain the attributes of regular cryptocurrencies providing users nearly a non-resilient choice to reserve their money.
This is the primary reason for stablecoins to reach greater heights with the stablecoin market cap ending on 129 billion dollars with a growth of over 545 percent.
Let’s have a look at the four types of stablecoins:
Stablecoins backed by Fiat
These types of stablecoins are fixed in a ratio of 1:1 by the likes of Euro or US dollars which is a reserve of fiat currency. Elaborating this we understand that for each USD kept by the issuer as a reserve, one EURST (Euro stablecoin) is provided for circulation.
Fiat favored stablecoins are also known as off-chain coins since the conventional method of collateralization is followed. In this method, a fiat currency is accumulated with a financial institution or a central authority.
To achieve stability in the coin’s rate, the reserve is managed in proportion to the tokens issued.
The most famous stablecoin is USDT which is also equally known for its controversy. This arose because of the non-transparency and disclosure of irregular audit reports to the public.
Recently EURT (Ethereum-based Euro stablecoin) is foraying into the crypto world which is also a stablecoin backed by Fiat. It is favored by the dollar but depicts Euro’s value. Some of the other examples include USDCoin, PAXOS STANDARD, and these all are backed by none other than the US dollar.
Stablecoins backed by Crypto
Cryptocurrencies back the crypto favored stablecoins. The Crypto market is mostly resilient and to compensate for this resilience, these stablecoins are frequently over pledged.
Stablecoins backed by cryptocurrencies are established from smart contracts and due to this, they are referred to as on-chain tokens. Decentralization is the major advantage of crypto-backed stablecoins since each transaction is registered on the Blockchain.
Examples of crypto-backed stablecoins are WBTC (Wrapped Bitcoin) and DAI.
Stablecoins backed by Commodities
These stablecoins are backed by commodities and their value is derived from assets like silver, real estate, oil, or gold. Since these assets are often subjected to fluctuations in their cost, these commodity-backed stablecoins are also open to changes in cost.
On the bright side, these commodities have a limited supply, unlike fiat currencies, so their worth doesn’t drop drastically.
Tokenization is being incorporated in markets such as real estate and Non-fungible tokens developing as a market, these stablecoins can be used as native tokens.
Examples of these stablecoins are PAXG (Pax Gold) and XAUT (Tether Gold). Every PAXG is fixed per ounce of physical gold and transactions can be done across borders.
Complex algorithmic stablecoins
These types of stablecoins are not favored by commodities but are preserved by the use of complex algorithms. The stability in the price of these stablecoins is achieved with the use of smart contracts that modify the amount of supply of these tokens.
If the value of the stablecoin increases, smart contracts are developed to circulate the supply tokens. Similarly, when there is a decrease in the value of the stablecoins, the tokens are sold by smart contracts thereby decreasing their circulation.
The algorithmic stablecoins success is directly proportional to their constant demand since they are not dependent on any collateral.
The need for constant demand serves as a hindrance resulting in limiting the growth potential of algorithmic stablecoins.
These stablecoins can remain stable due to the development of numerous innovative mechanisms and can be leveraged by the consumers as a circulating medium.
Examples of these stablecoins are Frax Finance and Ampleforth.
There are no stablecoins without flaws but there is a greater opportunity for the development and growth of these stablecoins due to their fundamental qualities.
Many legislators focus on the point that all stablecoins are not equally created and despite the name shared one might prove riskier than the other.
The resilience in the crypto market has to be stabilized to reap its entire benefits. The ambiguity regarding the stablecoins needs to be resolved and after resolving one can look out whether they replace or coexist with fiat currencies and central currencies.