Stablecoins crypto are specifically designed to minimize the price volatility of different digital assets.
Each Stablecoin is pegged to a cryptocurrency, fiat money or an exchange-traded commodities such as; precious and industrial metals.
Stablecoins are very important for saving values, while investing and saving your crypto assets for future profit.
Basically, Stablecoin creation is an attempt to keep crypto-coins away from continuous volatility of the market.
Types of stablecoin
There are 4 different types of stablecoins available in the cryptocurrency market, and below are the list:
- Fiat based stablecoin
- Commodity based
- Cryptocurrency backed
- Seignorage based stablecoins.
Now that you’ve known the number of stablecoins available in the crypto market, let’s discuss about each of them in details.
1. Fiat backed stablecoin
The most common type of Stablecoins is collateralized or backed by the fiat currency.
Fiat is paper money in your wallet and the digital money in your bank account.
Examples of fiat money include; NGN, USD, EUR, GBP, CHF, and JPY etc.
Fiat-backed stablecoins is backed at a 1:1 ratio, meaning that $1 of a stablecoin is equivalent to $1 of fiat money.
So for each stablecoin that exists in this category, there is real fiat currency being held in a bank account to back it up.
2. Commodity backed stablecoin
A commodity-backed stablecoin is a digital currency whose value is determined by a real tangible asset.
These assets may include gold and other precious metals.
These commodities may increase in value over time, and this increase gives more rewards to people who hold or use them.
Commodity holders can redeem and take possession of their asset but it will take days to do so.
3. Crypto backed stablecoin
These type Stablecoins is backed by other cryptocurrencies such as; Bitcoin, Ethereum and some other penny altcoins.
In this case, usage of central depositories such as banks is avoided.
This allows for decentralization (having no central authority) since everything is done on the blockchain.
4. Seignorage stablecoins
Seignorage is the only category of stablecoins which is not backed by any asset.
Seignorage coins operate with an algorithmic governed approach, just like a central bank that prints more bills.
As the total demand for this coin increases, new supplies are made. This is to reduce the price back to stable levels.
Top stablecoins crypto
There are good number of stablecoins in the cryptocurrency market, and below is the list to most of them:
Tether is backed by the US dollar, Euro (EU), and the Japanese yen (JP). Its market capitalization is about $4B at the time of writing.
USDT Tether is a well-known fiat-backed stablecoin is the currency Tether (USDT).
Tether is issued by a company called Tether Limited, and was launched as RealCoin in July 2014, and then rebranded as Tether in November 2014.
Tether is also the 3rd biggest coin in terms of the daily trading volume.
Tether is designed to offer stability (like fiat currencies), transparency and lower transaction charges to users.
TrueUSD is another popular stablecoin that was introduced in early 2018 with a simple, reliable and transparent designation.
For this reason, it does not use a hidden bank account.
TrueUSD is an alternative to Tether, due to the controversy on transparency of Tether totally back by fiat.
TrueUsd is the first major project built on the TrustToken platform (TrustToken is a platform to create asset-backed tokens).
TUSD was first traded on Bittrex but has expanded into other exchanges which include Binance, CoinTiger, Upbit, and more.
Digix Gold Token (DGX)
DGX is an ERC-20 token backed by physical gold. Each DGX token represents 1 gram of 99.99% LBMA standard gold.
This gold is stored in a vault in Singapore, known as The Safe House, and every 3 months the gold is being adjusted to ensure transparency (accuracy).
DGX is created by a company called DigixGlobal, which established and formed way back in 2014.
The value of each DGX token is fully determined by the market value of gold.
To redeem the physical bars of gold, DGX holders will have to travel to the vault in Singapore to do so.
Dai is a crypto-collateralized asset. It is an ERC-20 token that is created by MakerDao.
It is pegged to the US dollar to a 1:1 proportion meaning that 1 Dai coin equals 1 USD.
Dai is a cryptocurrency that runs on the Ethereum blockchain and based on this fact DAI is a decentralized cryptocurrency.
Basiscoin is a cryptocurrency formerly known as ‘Basecoin’, while the value is being backed by the US dollar.
This is done through algorithmic adjustments of the coin’s supply.
Price stability is achieved through the monitoring of various exchange rates, so if the coin is price goes above $1, new stablecoins are created and distributed.
However, when Basiscoin price valuation goes below $1, base bonds would then be created and sold.
Paxos Standard Token (PAX)
Paxos standard token is a fiat-backed stablecoin whose value is backed to the US dollar in a 1:1 proportion.
PAX is a stablecoin that is regulated and approved by New York State Department of Financial Services.
As an ERC-20 standard-based token developed by Paxos Trust company, the token can be sent and received by users of an Ethereum wallet.
Pax is also available 24/7 to ensure payments, or exchanges of any type of asset.
USD Coin (USDC)
USD Coin is a fiat-backed stablecoin backed by the US dollar, as the coin is a product of an open-source technology called CENTER.
USD Coin is an ERC20 token built using the Ethereum blockchain.
USD Coin allows people to use US dollars without requiring a bank account with a specific region and geography.
This coin is regulated, transparent and verifiable.
Stable USD (USDS)
Stable USD (USDS) is a fiat-backed or collateralized stablecoin created by Stably, and each token is transparent, legally backed and redeemable for a US Dollar.
Stable USD tokens are held in an insured escrow account managed by a trusting custodian, such as Prime Trust.
By making Stable USD redeemable and pegged 1:1 with US dollars, we can eliminate volatility.
Despite the fact that stablecoins
are still in their early stage, they have many potentials to the real-world applications.
Stablecoins can be use for every other day transactions, including buying of pizza, buying things from Amazon and similar marketplaces.
These coins can be used like any other currency for day-to-day purposes.
Stablecoins allows usage of P2P (Peer-to-Peer) smart contract payments, and no third-party is needed.
This is beneficial for businesses that have employees all over the world because it reduces fees and long process.
Protection from local currency crashes
Undoubtedly, local currencies normally reduce in value, citizens like you and I could exchange our money to Euro or US dollar to retain its purchasing value.
Likewise, we can convert our fiat currency to commodity-backed stablecoins like gold due to its high stability in value.
This protects our life savings from further drops in value.
People travel around the world, and most of the times, they have families that requires their financial help.
Stablecoins makes it very easy to remit money from one country to the other and it also enable affordability of the whole process.
Limitations of stablecoin
As stablecoins present many advantages, they still have their limitations.
Fiat-backed stablecoins is centralized, therefore, trust is extremely required
Commodity-backed stablecoins, traveling to Singapore is expensive, and could take months to redeem your physical gold
Crypto-collateralized stablecoins that is backed by cryptocurrencies, and they usually fluctuate in price value
The base system of Seignorage style stablecoin is complex and difficult to understand.
In other words, investing or saving value with such token can lead to loss of your investment.
Volatility of the crypto market can be discouraging, especially when the value of your crypto investment keeps fluctuating.
Hence, the Stablecoins can imply help you to keep the value of your investments on a table state.
Every stablecoin value is pegged value to an underlying asset, so crypto users can save their assets from loosing its value.