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What Are Stablecoins?

What Are Stablecoins?

The US is discussing launching a formal review into whether Tether and other stablecoins threaten financial stability.

  • The first stablecoin, created in 2014, was Tether.
  • A stablecoin is a type of cryptocurrency that is typically pegged to an existing government-backed currency.
  • A cryptocurrency is a form of digital asset based on a network that is distributed across a large number of computers.
  • Stablecoins hold a bundle of assets in reserve, usually short-term securities such as cash, government debt or commercial paper.
  • Stablecoins are useful because they allow people to transact more seamlessly in cryptocurrencies that function as investments, such as Bitcoin.
  • They form a bridge between old-world money and new-world crypto aslo they promise to function like perfectly safe holdings.

Types:

Fiat-collateralized Stablecoins:

  • They are collateralized by fiat money, such as the US dollar, euro or the pound, on a 1:1 ratio.
  • Examples: Tether, Gemini Dollar, and TrueSD.

Stablecoins Backed by Other Assets:

  • There are a few stablecoins, which are backed by a basket of multiple assets (commercial papers, bonds, real estate, precious metals, etc).
  • The value of these stablecoins can fluctuate over time subject to movement in commodity and precious metal prices.
  • Example: Digix Gold, backed by physical gold.

Crypto-Collateralized Stablecoins:

  • Crypto-collateralized stablecoins are more decentralised than their peers and are backed by cryptocurrencies.
  • The flipside is price volatility and to address the risk of price volatility, these stablecoins are over-collateralized.
  • Example: Dai.

Non-collateralized stablecoins:

  • These stablecoins do not have any backing and are decentralized in the true sense and the supply of non-collateralized stablecoins is governed by algorithms.
  • Example: Basis.

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