Stablecoins and Their types
In the previous two posts, I tried to discuss stable coin and their features, and advantages in the crypto ecosystem. Today I am going to share the types of stable coins. In the fast-paced world of cryptos, stability is very important after quality. While the volatility of flagship cryptos like Bitcoin and Ethereum has drawn attention to their potential for substantial gains, it has also deterred some potential users due to the associated risks. To find the solution to the volatility problem, the stable coil has emerged in the cryptocurrency world. It is a unique class of digital assets that strive to provide the best of both worlds: efficiency and security combined with a stable value that is typically pegged to traditional fiat currencies or other assets.
The fluctuation of the price is the main problem with the cryptocurrency which can be easily solved with the stable coin. These fluctuations can make everyday transactions and long-term contracts challenging. The anchoring mechanism of stablecoin provides stability. This stability makes stablecoins attractive for use in various applications such as remittances, smart contracts, decentralized finance (DeFi) protocols, etc.
There are primarily three types of stablecoins. These are- fiat-collateralized, crypto-collateralized, and algorithmic.
Fiat-Collateralized Stablecoins:
These are perhaps the most straightforward types of stablecoin. They are backed by a reserve of traditional assets. They are usually held in a bank account. For every unit of stablecoin issued, there is a corresponding unit of the reserve asset stored. Tether (USDT) and USD Coin (USDC) are prime examples of this. Their value is maintained at or close to 1:1 with the underlying fiat currency.
Crypto-Collateralized Stablecoins:
In this model, stablecoins are backed by other cryptos. While the mechanisms can be complex, they usually involve over-collateralization, where more cryptocurrency is held in reserve than the value of the stablecoins issued. DAI, running on the MakerDAO platform, is a prominent crypto-collateralized stablecoin.
Algorithmic Stablecoins:
These innovative stablecoins rely on algorithms and smart contracts to maintain their stability. They do not have physical collateral backing them; instead, their value stability is achieved through algorithmic mechanisms. Ampleforth is an example of this category. If the price is too high, the smart contract expands the supply, diluting each token holder, and if the price is too low, the supply contracts.
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VEIGO (Community Mod)
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