What Are Stablecoins?
Stablecoins are a form of cryptocurrency whose value is pegged to an underlying asset, such as fiat currencies, other cryptocurrencies, or commodities. This feature aims to make stablecoins relatively resilient to market fluctuations. Due to this, stablecoins are commonly used to facilitate commercial transactions and exchanges.
Types of Stablecoins
Fiat-collateralised stablecoins are the most common form of stablecoins. They are usually pegged to a certain fiat currency, such as USD, GBP, or euro with a one-to-one ratio. For example, if a stablecoin is pegged to the USD, one unit of that particular stablecoin is equal to US$1.
Instead of a fiat currency as collateral, crypto-backed stablecoins have cryptocurrencies locked up as collateral. Although this is conceptually similar to fiat-backed stablecoins, the crypto assets in a crypto-backed stablecoin use smart contracts. This allows the stablecoin to maintain its price stability through supplementary instruments and incentives.
Commodity-backed stablecoins are a blockchain-based representation of commodities, which are backed by a reserve in a central entity. This type of stablecoin is collateralised using tangible assets, such as precious metals, real estate, and oil. Gold is the most commonly collateralised commodity.
Non-collateralised stablecoins (Algorithmic stablecoins)
Non-collateralised stablecoins, such as algorithmic stablecoins, do not have the backing of any assets or collateral. Instead, they rely on complex algorithms to maintain the stability of prices. Using smart contracts, each algorithm balances the supply and demand of the stablecoin to maintain price stability.