Stablecoins are designed to minimize the volatility typically associated with cryptocurrencies, making them more attractive for use in everyday transactions and as a store of value. There are several different types of stablecoins, including those pegged to a fiat currency, those backed by a basket of assets, and those using algorithmic methods to maintain stability viz;

  • Fiat-collateralized stablecoins: These stablecoins are supported by a fiat currency reserve, such as US dollars or euros, that is kept in a bank account. The stablecoin’s value is linked to the value of the fiat currency that serves as its backing. Stablecoins with fiat collateral include Paxos Standard, USD Coin, and Tether (USDT) (PAX).
  • Crypto-collateralized stablecoins: These stablecoins have a reserve of a different cryptocurrency, such Bitcoin or Ethereum, as their backer. The stablecoin’s value is correlated to that of the underlying cryptocurrency. DAI, a decentralised stablecoin backed by ETH, is an illustration of a crypto-collateralized stablecoin.
  • Commodity-collateralized stablecoins: These stablecoins have a reserve of a commodity, like gold or oil, to support them. The stablecoin’s value is correlated to that of the underlying good. DigixDAO (DGD), a stablecoin that is collateralized by commodities and backed by gold, is one such instance.
  • Non-collateralized stablecoins: These stablecoins rely on computational processes to guarantee stability since they are not backed by any assets. Stablecoins of the seigniorage type are an illustration of non-collateralized stablecoins; these use a central bank-like algorithm to modify the stablecoin’s supply in response to changes in demand.
  • Algorithmic Stablecoins: These stablecoins regulate supply and demand using a set of guidelines, protocols, and smart contracts to maintain price stability. They are decentralised, with Ampleforth being the most well-known example (AMPL).

Before making an investment, it’s critical to comprehend the differences between each form of stablecoin as each has a unique set of advantages and disadvantages. While certain stablecoins may be more stable than others, they might also be more or less transparent or be subject to various rules.

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