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.
