Ever heard of a stable coin? Stable coins are forms of cryptocurrencies, specially designed to offer stability in prices. This kind of virtual currency class has the support of a reserve asset. What are trading robots? These have got some traction in the last few years, as users can get the benefit of immediate processing as well as the privacy or security of cryptocurrency payments. They can also get stable, fiat currency valuations without any volatility.
The stability in prices is achieved by stablecoins through algorithmic systems of sale and purchase of the reference asset or any of its derivatives or through backing (collateralization).
According to the platform Bitcoin Era, more and more investors are considering making investments onto this kind of cryptocurrency with the hope of being able to make solid returns on investment, without risking their funds in the process. Read on further to know more about everything about Stablecoins.
Types of Stablecoins- Points To Note
Fiat currencies such as the USD or the Euro have some advantages, given that these are backed by the credit of the government – which is the issuer, and it is backed by complete faith.
Due to this reason, Fiat currencies come with some amount of stability in prices. But the backing of an authority also means that inherently many of these currencies are regulated by the central banks of the government. Stablecoins have been released with the purpose of bridging this gap between cryptocurrency and Fiat currencies.
These types of coins are available in three categories, all of which are based on their mechanism of action.
- Fiat-Collateralized Stablecoins
The Fiat-collateralized stablecoins work as the US dollar, issuing the correct number of crypto coins. Some other types of collateral can include expensive metals, such as silver or gold, as well as important commodities such as oil; although most of the Fiat collateralized stablecoins of the modern day make use of dollar reserves. Independent custodians maintain these reserves and the coins are audited regularly to check for adherence to the necessary standards of compliance.
TrueUSD (TUSDUSD) and Tether (USDTUSD) are two of the famous crypto coins which have a value equal to 1 US dollar and come with the backing of dollar deposits.
As observed in January 2022, in terms of market capitalization, USDT is the third biggest cryptocurrency with a worth of over 78 billion dollars.
- Crypto-Collateralized Stablecoins
The crypto- collateralized stablecoins come with the support of other cryptocurrencies. Given the fact that the reserve cryptocurrency may also be susceptible to a lot of volatility, these types of coins are over-collateralized – which means that many of the cryptocurrency tokens are maintained as a reserve, in order to issue a reduced number of stablecoins.
For instance:
- Ether worth $2,000 can be held in the form of reserves, in order to issue crypto backed stablecoins worth $1,000 – which can accommodate as much as 50% of reserve currency (ether) swings. The prices are more stable due to more frequent monitoring and auditing.
- DAI (DAIUSD) of MakerDAO comes with the support of Ethereum (ETHUSD), and it is pegged against the USD. It allows the use of a cluster of crypto assets in the form of reserve.
- Non-Collateralized (Algorithmic) Stablecoins
These do not make use of any reserve but include a functional system, such as that of a centralized bank, in order to retain price stability.
For example, the basecoin – which is pegged by dollar, makes use of a consensus system, in order to reduce or raise token supply on the basis of need.
These kinds of activities are just like that of the printing of banknotes by a centralized bank, in order to maintain Fiat currency valuations. This can be obtained by using a smart contract on a platform that is decentralized and operating autonomously.
Final Words
Now, finally, above all these, smart contracts are self-executable contracts between buyers and sellers, maintaining complete transparency. The program and the agreements present within tend to exist across a decentralized, distributed network of blockchain. The execution of smart contracts is totally maintained by the codes which makes every transaction irreversible and trackable. This makes it similar to, but different from, Bitcoin and many other cryptocurrencies out there.
