Types Of Stablecoins
What is Stablecoin?
As cryptocurrency is highly volatile, there is limited participation in it. Not everyone is willing to invest in such a volatile market. That’s when stablecoins come into the picture. Stablecoins are the less volatile version of cryptocurrency, as a stable asset backs them. Stablecoins provide all the advantages of crypto while eliminating its biggest concern of volatility.
Types of Stablecoins
- Commodity-backed Stablecoins
These stablecoins are backed by assets like oil, precious metals, and real estate. Gold is the most commonly used metal to collateralize stablecoins, while there is also the use of some other precious metals. Unlike most cryptocurrencies, the owners of such stablecoins have a tangible asset that they hold. With the increase in the price of these assets, the price of these stable coins also increases and can lead to greater profit.
- Fiat-backed Stablecoins
These stablecoins are backed by fiat currencies like the US Dollar, the Euro, and the Great British Pound. Most stablecoins are backed by the US dollar. They backed these with a 1:1 ratio, which means 1 stablecoins equals 1 unit of currency (say 1 USD). So theoretically, for each stablecoin, there is a fiat currency in the bank account to back it up.
When an owner of a stablecoin wants to redeem fiat currency for its exchange, the managing party sends the fiat currency from their reserve to this person’s bank account. After which, the corresponding stablecoins get destroyed and removed from circulation.
- Crypto-backed Stablecoins
In crypto-backed stablecoins, one crypto is backed against another crypto. Such stablecoins are more decentralized as they manage everything on the blockchain, unlike the fiat-based stablecoins.
Crypto-backed stablecoins are the most complex form of stablecoin and have yet to gain popularity. A well-known crypto-backed stablecoin is Dai.
Final Thoughts
Stablecoins serve as a safer option for investing in crypto. It is also more convenient to transfer crypto to stablecoins than to fiat currency. As we saw, there are different stablecoins based on the asset that backs them, such as commodity-backed stablecoins, fiat-backed stablecoins, and crypto-backed stablecoins.
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