Types of Stablecoins

Stablecoins- we may know them as the safer side of cryptoverse. You may invest in them and it's virtually risk-free because the value of a stablecoin isn't as volatile as the ordinary crypto coin, I mean, it's called STABLEcoin for a reason.

I have already covered a bunch of things regarding Stablecoins. What their purpose is, what is it really about, and why they really exist. I have also covered who funds them. And if you would like to read more about them, you can visit my previous article here: What About Stablecoins?

In this one, we'll look a little deeper into Stablecoins as we break them down into groups and types. And yes, there are different types of Stablecoins, the good type is my favorite type but let's see what the others are.

The classifications of Stablecoins are based on how a Stablecoin is funded or backed.

Fiat-Collateralized Stablecoins

This type of Stablecoins is also known as Traditional Collateralized or Off-chain Collateralized Stablecoins. I agree, this one's pretty uncommon in the tongue even though it is supposed to be "traditional".

These Stablecoins are backed by "traditional" or fiat assets, hence the name. And it means that they are funded by traditional money. For example, you would like to issue Stablecoins under the name The Real Peso or TRP, and you want to have a supply of 10,000,000. If you will match the TRP with peso value, then you have to fund your Stablecoins with 10,000,000 pesos.

And if we are talking about US$ here, then it grows exponentially. Let's say you want to make and issue a Stablecoin with the name RealUSD or RUSD and you want its total supply to be 1 Million. Then you have to fund your stable coin 1 Million US$ because the aim of a Stablecoin is to have its value 1:1 against the fiat currency it is mimicking.

Wow, just imagining that amount of money is ridiculous. So, can I buy a lambo then instead of issuing my own Stablecoin? I wonder.

Crypto-Collateralized (On-Chain)

If we have Off-chain, we have on-chain. These Stablecoins are backed up by another cryptocurrency. If the first type is funded by fiat currency, then this one's funded by other crypto coins. They just use the same principle but their difference is also evident in equivalency. When fiat is used as collateral, the ratio is a simple 1:1, but it gets tricky with crypto-collateralized Stablecoins since the volatility of cryptocurrency is so high. In crypto-based Stablecoins, they are collateralized with 200% collateral, so instead of 1:1, the exchange rate is 1:2. So if you want to have a share of $200 worth of Stablecoins of this nature, then you will have to deposit $400 worth of crypto, let's say Bitcoin.

That's a pretty steep price, but that's a small price to pay to somehow ensure the stability of the coin's value.

Also, Stablecoins of this type rely on blockchain technology to work instead of a centralized entity thus promoting a decentralized option for investing in Stablecoins.

They make use of Smart Contracts to manage and process transactions.

They even lessen the risks because instead of centralizing all the funds in one individual or company, they are all in the blockchain, so no one can really take everything away and just run with it unless they're very skilled hackers. In that case, we can only do so much.

Commodity-Based Stablecoins

Stablecoins under this type are pretty interesting. Instead of being backed by fiat or cryptocurrency reserves, they are backed by physical assets such as precious metals, like gold, platinum, silver, or even oil. Even real estate can be used to back and fund a Stablecoin.

That's interesting, I think that I have to read more about this so I can share more about this very exciting type. I mean, there's just so much we can learn from this, how does it work? The commodity values aren't fixed as fiat currencies, so how do they deal with it, right? I'll get back to that stuff soon. But for now, let's move on to the next type.

Algorithmic Stablecoins

These Stablecoins aren't backed by anything. Not fiat, not cryptocurrency, not even commodities. And in that sense, it's just like any other cryptocurrency. But what makes it a Stablecoin is that it maintains its price or value by adjusting its supply automatically.

If its price goes higher than the acceptable threshold, then it creates new coins to bring down the scarcity and bring the price down to the acceptable level. And it does the opposite thing when the price goes down.

And that magic is of course all made possible by smart contracts.

There's just one thing that you should always remember when dealing with Stablecoins of this kind. They aren't backed by anything so they can lose their value in an instant if you're caught with your thumbs up your butt.

Conclusion

There are several types of Stablecoins according to the reserve that is backing them. But just like any kind of investment, there is no real "zero-risk" thing. Nothing ventured, nothing gained. Even if they are called Stablecoins, they are still in the cryptoverse and once you're dealing inside that lucrative yet treacherous universe, then you are already at risk.

Always DYOR and scrutinize everything.

Hi!

As usual, this isn't a financial lecture and it's definitely not a piece of advice. I am just sharing what I learn for the day. And I hope that I was able to impart what little I have realized today.

That's it from me and I'll need a little more rest to stabilize my body, I need some Stablecoins. Lol.

Thank you for visiting, until we read again...

Cheers!!!

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Series    : All About Crypto
Title     : Types of Stablecoins
Published : 02-May-2022
Author :  © RB

References:

What Is Stablecoin? (2022, January 27). Investopedia. Retrieved April 30, 2022, from https://www.investopedia.com/terms/s/stablecoin.asp

What Are Stablecoins and How Do They Work? (n.d.). Gemini. Retrieved April 30, 2022, from https://www.gemini.com/cryptopedia/what-are-stablecoins-how-do-they-work#section-medium-of-exchange-and-store-of-value

Iredale, G. (2021, November 1). What are the Different Types of Stablecoins? 101 Blockchains. Retrieved April 30, 2022, from https://101blockchains.com/types-of-stablecoins/

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