All About Stablecoins

Stablecoins have become immensely popular in the last few years. So, what are Stablecoins and how do they work? In this article, we will be discussing the three basic varieties of stablecoins.

Stablecoin Basics

Stablecoins are price-stable, digital assets which bridge the gap between the cryptocurrency market and other markets. Most often, stablecoins mimic fiat currencies. The most common example of this is Tether’s USDT, which is a traditional collateral stablecoin that mimics the US dollar, while allowing it the mobility of cryptocurrency. There are, however, a variety of other stablecoins out there which serve a variety of different purposes. There are three main categories of stablecoins.

These Categories are:

• Traditional collateral stablecoins
• Crypto collateral stablecoins
• Commodity-backed stablecoins

Traditional Collateral Stablecoins

Traditional collateral stablecoins are cryptocurrencies that are backed by fiat currencies at a 1:1 ratio of value. Using USDT as an example, one USDT is worth one USD. The issuer of a stablecoin – in this case Tether – is required to keep one USD, or an equivalent off-chain asset in a bank account before they can issue one USDT token. Aside from Tether’s USDT, there are a variety of other USD stablecoins on the market. These include the Paxos Dollar (UDSP), True USD (TUSD) and Circle’s (USDC) stablecoin.

Crypto Collateral Stablecoins

Crypto collateral stablecoins are similar to traditional collateral stablecoins, except instead of being backed by fiat currencies, they are backed by other cryptocurrencies. With crypto collateral stablecoins, there is no need for a central issuer, as the entire process occurs on chain and is mitigated by smart contracts. Another difference between crypto collateral stablecoins and traditional collateral stablecoins is their backing ratio. Because cryptocurrency is generally more volatile than fiat currency, crypto collateral stablecoins are backed at a 2:1 ratio. As an example, if you wanted 100 DAI tokens – which are linked to the price of the US dollar – and you were placing ETH in a smart contract in order to unlock the DAI tokens, you would need to deposit $200 of ETH in the smart contract. This 2:1 ratio for crypto collateral stablecoins is intended to buffer against market fluctuations.

Commodity Backed Stablecoins

commodity backed stablecoins are backed by physical assets, such as property, oil, and precious metals. The most common commodity backed stablecoins are those backed by gold, such as Tether Gold (XAUT). and Pax Gold (PAXG). Commodity backed markets provide a convenient solution for traders who are looking to trade physical assets, while simultaneously taking advantage of the financial mobility which comes with cryptocurrency.

One of the other benefits which come with commodity backed stablecoins is the fact that they can directly be exchanged for the specific commodity that they represent. As an example, Pax Gold will exchange their tokens for physical gold, although the number of tokens this requires is significant. Each PAXG token is equivalently worth the same amount as one ounce of gold, and Pax Gold will not exchange any amount less than 430 oz of gold bars, for 430 PAXG tokens.

Conclusion

Stablecoins have gained a significant amount of popularity within the last several years. in fact the total stablecoin market value has increased by nearly 300% within the last year. Hopefully this article has helped you understand a little more about how these useful stablecoins work, and how much potential the stablecoin market can unlock in the future!

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