The volatility of the crypto space discourages most fresh adopters from joining the industry. However, stablecoins offer low volatility and present investors with a good opportunity to keep their assets in the crypto sector.
Stablecoins are usually linked to other stable assets, although an algorithm can alternatively back them. People buying or selling non-currency products and services may see a significant price difference after or during transactions. But, stablecoins create a level playing field without requiring either party to return to fiat currency. The fluctuating price of Bitcoin in 2017 led to a greater demand for a more stable store of value. Since then, stablecoins have grown in popularity.
Prominent Features of Stablecoins
Stablecoins are essentially cryptocurrencies that have a built-in stability mechanism. As a result, their characteristics are very similar to those of cryptocurrencies. However, before we get into their different types, let’s look at their overall characteristics.
- Privacy
Stablecoins have no links to corporate or personal data, boosting their ability to provide anonymity. It is often hard to associate these coins with a specific owner or organization. - Security
Security is one of the most important advantages of stablecoins. Owners can store these coins in virtual wallets and secure them using a private key. Furthermore, users could deploy enhanced encryption systems on their storage devices to improve security. - No need for third parties
One of the most notable characteristics of stablecoins is the absence of intermediaries. Stablecoins, like cryptocurrencies, eliminate the fees and difficulties associated with regulations and governmental control. Furthermore, owners have assurance over the safety of their coins since stable assets, such as fiat currencies, back them.
Types of Stablecoins
Stablecoins are categorized based on the assets that back them. Here’s a look at their types:
Fiat-backed
National currencies such as the pound or the US dollar back these stablecoins. Also, to issue a particular number of tokens of a cryptocurrency, the issuer must provide collateral in the form of dollar reserves of the same amount.
Fiat-backed stablecoins are classified as off-chain assets. This is because the backing collateral isn’t a cryptocurrency. Also, fiat collateral is held in reserve by a central issuer or financial institution. Tether (USDT), True USD (TUSD), and Paxos Standard (PAX) are some of the most valuable in this category.
Crypto-backed
Crypto can also provide backing for another crypto. Stablecoins backed by crypto are an example of this. These kinds of coins do not rely on a central issuer. Instead, they occur on-chain and use smart contracts. Buyers of this type of stablecoin lock their crypto into a smart contract in exchange for tokens of equivalent worth. Furthermore, they can withdraw their initial collateral amount by putting their stablecoin back into the same smart contract. The most well-known in this category is DAI.
Also, a crypto-backed stablecoin retains an overcollateralized position. This is done to offset the higher relative volatility of backing stablecoins with crypto. In other words, compared to fiat-backed currencies, the stablecoin will circulate a significantly smaller supply than the reserve. Furthermore, crypto-backed coins can also provide more liquidity than commodity-backed stablecoins. This happens since they can be swiftly converted back to the underlying asset. However, these types of stablecoins are more complicated. Furthermore, they haven’t gained much fame as other options.
Algorithmic Stablecoins
This type of stablecoin does not use fiat or cryptocurrency. Instead, it uses specialized algorithms and smart contracts to govern the supply of tokens in circulation and price stability. Furthermore, this system also reduces the number of tokens in circulation if the market value drops below the fiat currency they depict. Additionally, the system issues fresh tokens if their price exceeds the fiat currency they track. This would ensure the adjustment of the stablecoin’s value. DAI and UST are good examples of this type of stablecoin.
Commodity-backed
Tangible assets such as valuable metals, oil, and housing can provide backing for stablecoins. Tether Gold (XAUT) and Paxos Gold (PAXG) are two prime examples of this. However, it’s vital to realize that these commodities can vary in price. As a result, they might lose value.
Additionally, stablecoins backed by commodities make it easier to invest in assets that might otherwise be out of reach on a local level. Getting a gold bar and locating a secure storage site, for example, is costly and difficult in many areas. This means that owning tangible assets such as gold and silver isn’t always a viable option. Also, people who want to exchange tokens for cash will find commodity-backed stablecoins useful. For instance, Paxos Gold (PAXG) stablecoin holders can sell them for cash or take possession of the underlying gold.
Stablecoins to Consider
Stablecoins do not have equal value. As a result, some perform better than others and have more engagement. If you are seeking to dive into the market, here’s a list of some to consider:
- Tether – USDT
- USD coin – USDC
- Binance USD – BUSD
- TerraUSD – UST
Finally, stablecoins are good investment options. However, the present state of the market would require close diligence before making decisions.
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