We all know how cryptocurrencies have evolved, starting from Bitcoin to Ethereum to now newer cryptocurrencies, everyone has started looking at them as an investment opportunity. The only problem with these cryptocurrencies is the volatility and that is what has given space to stablecoins which are tokens which has the security and decentralized properties of normal cryptocurrencies along with the stability of a FIAT currency.
What is a Stable Coin?
A stable coin is a cryptocurrency token whose value is pegged to another currency, commodity, or financial instrument. These are designed to be a replacement for cryptocurrencies with higher volatility. So in simple terms, stablecoins are like tokens or the digital equivalent of FIAT currency in digital form which has the same value and can easily be exchanged with any other cryptocurrency. Because of the less volatile nature of stable coins people are more inclined towards investing in stable coins which makes these pretty popular these days.
Advantages of Stable Coin
- It is a stable digital currency with very low volatility.
- It is easy to exchange with few clicks
- It provides financial services access to people without bank accounts
- It helps diversify the payment.
Disadvantages of Stable Coin
- If many people want to sell their stablecoin at the same time there is always a liquidity risk.
- Since it’s a cryptocurrency where there is no regulatory body, so there is always a regulatory risk, but this is the nature of a cryptocurrency.
- Counterparty risk in case of loss of the FIAT currency by the entity holding these assets.
Types of Stable Coin
Collateralized stablecoins
Collateralized stablecoins are the token which are backed by some kind of collateral, it can be an asset like gold or silver, a FIAT like USD or EUR or a crypto.
Fiat backed stablecoins
Fiat based stablecoins are the tokens which are backed by real FIAT currencies such as USD, EUR etc. The first fiat backed stablecoin was Tether(USDT) which introduced the concept of a crypto token pegged to FIAT (US dollar) in this case. So these are supported by reserves representing the total market capitalization of FIAT which they are backed by.
Asset backed stablecoins
Asset backed stablecoins are the tokens which are backed by some kind of real world asset such as gold, silver, diamond, real estate, oil or anything else in real world which has value in all different parts of the world.
Crypto backed stablecoins
Crypto based stablecoins are the token which are backed by some other cryptocurrency. DAI is a crypto-backed stablecoin that is supported by Ethereum and pegged to the value of the US dollar. Its price stability is maintained through the Maker Smart Contract, which adjusts the supply of MKR tokens in response to changes in the price of Ethereum.
Algorithmic stablecoins
Algorithmic stablecoins works based on a computer program or preset instruction with the strategy to keep the stablecoin’s price stable by controlling its supply via an algorithm. This is basically an algorithm which can increase or decrease the supply of tokens and match the price of the token with the said value of the attached Fiat currency.
Conclusion
Since the advent of the stable coins, some of the stable coins have done very well and some have come out to be not quite stable with their value. But as of now, asset based stable coins are more stable and reliable until we find an algorithm which is 100% working in all the cases. In Next blog we will be covering a short development tutorial on how to create your own stable coin from scratch.
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Co-Founder Simplileap
Passionate Full Stack Developer with an unwavering enthusiasm for technology and a relentless drive for continuous learning with more than 10 years of experience in Web Development, SEO and Software Development. Committed to pushing boundaries, I thrive in dynamic environments where I can leverage my expertise in front-end and back-end development to create innovative solutions. With a strong foundation in various programming languages and frameworks, I am dedicated to staying updated with the latest industry trends and incorporating them into my work.
