The types of stablecoins

What is a Stablecoin?

Stablecoins are cryptocurrencies aimed at having a stable value. They are different from Bitcoin and the main altcoins, such as Ethereum, XRP and Litecoin, for which 10% floats are not uncommon in less than 24 hours.

As the demand for less volatile crypto assets grew, technology and fintech companies around the world attempted to create more “stable” coins. As these crypto assets have the lowest risk of devaluation with all the added benefits of cryptocurrency, economic agents feel more secure to make transactions, take out loans, and keep this type of currency as a reserve of value.

In addition, exchanging stablecoins to other cryptocurrencies is much easier than exchanging them to fiat money. For example, if there is a negative fluctuation in the value of Bitcoin, it is possible to exchange it to a stable currency of your choice in just a few minutes. Additionally, if the BTC values ​​go up, the reverse process is also very simple – and Crypto InterCambio can help you it!

There are multiple ways for stablecoins to achieve stability. Most are anchored to another asset, such as fiat currencies, commodities, and even other cryptocurrencies. There are also those that are not pegged to any other assets, stabilized only by algorithms. Let’s take a look at each of these types of stablecoins.

The types of stablecoins

Stablecoins anchored to fiat money

The main stablecoins are backed by fiat currencies – such as the US dollar (USD), the euro (EUR) and the yen (JPY). Between cryptocurrency and real currency, a fixed parity is established – x units of stablecoins cost y units of fiat currency.

The big drawback of this type is that unlike the most famous altcoins, these cryptocurrencies are released in a centralized way. The company owns the blockchain, and it must hold the amount of fiat currency corresponding to the amount of stablecoins it releases to the market. Some examples are:

  • Tether (USDT) – created by Tether Limited, it is the most well-known stablecoin. Tether is anchored to the US dollar;
  • EURO Stasis (EURS) – another widely used stablecoin, anchored to the Euro;
  • Brazilian Digital Token (BRZ) – anchored to the Brazilian Real.

Stablecoins anchored to commodities

Stablecoins are sometimes anchored to a certain number of commodities. The logic is similar to that of crypto being anchored to fiat currencies: each coin has a fixed parity at a quantity z of a product such as oil, gold or copper.

The advantage of this type of stable currency is that its value is not linked to Central Bank policies, but to the value of raw materials (which may vary depending on the global economic context). However, they are still centralized cryptocurrencies, issued by the companies that own the blockchain, which also store the commodities to guarantee the coin’s stability.

Some of the most famous stablecoins of this type are:

  • DigixDAO (DGX) – one of the oldest stablecoins, DGX is anchored to gold. 1 token = 0.1 gram of gold (stored in the company’s deposit);
  • PAX Gold (PAGX) – another stable currency that is based on the price of gold;
  • Petro (PTR) – is the official cryptocurrency of the Venezuelan government. It is backed by the country’s oil barrels.

Stablecoins anchored to other cryptocurrencies

Unlike other stablecoins, this innovative type of stable cryptocurrency has a decentralized structure. Instead of being linked to a fiat currency or a certain amount of raw materials, it is anchored to other cryptocurrencies.

There are a few cryptocurrencies of this type. The most well-known example is Dai:

  • Dai (DAI). Anchored to Ethereum (ETH), it has a fixed value of 1 DAI = 1 USD. If the value of DAI exceeds 1 USD, the algorithm offers economic incentives to Ethereum users to exchange the crypto for DAI, thus lowering its price; if the stablecoin value is less than 1 USD, incentives are offered to exchange DAI for ETH, increasing its price.

Stablecoins not anchored to another asset (“seigniorage”)

Known as “seigniorage”, this type of stablecoin is not backed by any other assets. Its operating mechanism is quite similar to a central bank of a country: a fixed value is established (for example: 1 cryptocurrency = 1 euro); if the value deviates from the established price, the company that owns the currency issues or buys the coins in circulation, so that the stablecoin returns to its established price.

Some examples of this type are:

  • NuBits (USNBT): the most popular seigniorage stablecoin. Has the price gone up? The algorithm will create NuBits and sell them in the market so that the value falls. Has the price declined? The algorithm will destroy tokens to increase their value.
  • Basis – one of the most important seigniorage stablecoins. It reached the market value of 133 million dollars; however, the developer locked up activities for regulatory reasons.

Conclusion: what is the future of stablecoins?

Possessing both the benefits of blockchain technology and the greater stability, stablecoins promise to continue to gain more traction as well as to continue to popularize crypto. As a stablecoin’s value does not fluctuate too much, it can be safer and easier to use for commercial transactions, services, investments, etc.

Some stablecoins (like Tether) are already well established among crypto users, but the fact is that this type of crypto assets still has a long way to go. Governments and companies around the world have studied the possibilities of creating their own centralized stablecoins as a way to take advantage of this unique moment in monetary history and prepare for the future changes in the economy.

At the same time, decentralized stablecoin projects are also moving forward. The case of DAI is exemplary: by being pegged to another famous cryptocurrency (the Ethereum), it quickly became popular among crypto users. It showed resistance even in the time of severe crisis: in 2018, when the price of ETH collapsed from $1,400 to $400, the DAI system remained intact.

In the coming years, it is very likely that the two types of stablecoins – centralized and decentralized – will coexist and compete in the cryptocurrency market alongside the altcoins.

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