Stablecoins for beginners. Types of Stablecoins

In this article we will talk about types of stablecoins, how they work, who is behind them, and of course PROS and CONS.

Since the dawn of the internet, there has been a demand to take fiat digital and reduce its permissions. Entrepreneurs and institutions tried the idea of creating a digital dollar and initiated the journey by launching BitUSD.

Launched in 2014, BitUSD was the first stablecoin issued as a token on the BitShare blockchain. The pioneering stablecoin was the brainchild of two prominent figures in the blockchain industry, Charles Hoskinson and Dan Larimer. The token was backed by the /core token of BitShares, BTS, and was collateralized by a range of other cryptos — all locked in a smart contract to act as collateral.

Stablecoins are a type of cryptocurrency that is pegged to a stable asset, such as the US dollar or gold. The main advantage of stablecoins is that they offer the stability of traditional fiat currencies, while still providing the benefits of blockchain technology and cryptocurrency.

One of the most well-known stablecoins is Tether (USDT), which is pegged to the US dollar on a 1:1 basis. This means that for every Tether token in circulation, there is a corresponding US dollar held in reserve. This ensures that the value of Tether remains stable, as it is tied to the value of the US dollar.

Other stablecoins are pegged to a basket of assets or commodities, such as the Gemini Dollar (GUSD), which is backed by a combination of US dollars and cryptocurrency assets. There are also stablecoins that are backed by physical assets, such as gold or real estate.

Stablecoins have a number of potential uses. One of the most significant is as a means of storing value. Since stablecoins are pegged to stable assets, they can be used as a way to hold and transfer value without the volatility associated with other cryptocurrencies.

They can also be used as a way to transfer value between different cryptocurrencies, as well as between traditional fiat currencies and cryptocurrencies. This can be particularly useful in countries where the local currency is unstable or the government has strict controls on the movement of money.

In addition, stablecoins have the potential to be used as a way to facilitate international trade and financial transactions. They can be used to bypass traditional financial systems and provide a secure, transparent way to transfer value across borders.

Overall, stablecoins offer a unique combination of stability and the benefits of blockchain technology. While they are still a relatively new concept, they have the potential to revolutionize the way we think about money and financial transactions.

One of the primary advantages of stablecoins is their stability. Unlike traditional cryptocurrencies such as Bitcoin, which can be highly volatile and prone to extreme price swings, stablecoins offer a more stable and predictable store of value. This makes them appealing to merchants and consumers who are hesitant to accept or use cryptocurrencies due to their volatility.

There are several different types of stablecoins, each with its own unique features and characteristics. Some common types of stablecoins include:

• Fiat-collateralized stablecoins: These stablecoins are backed by a reserve of fiat currency, such as the US dollar. The value of the stablecoin is typically pegged to the value of the underlying fiat currency, so one stablecoin will always be worth approximately one US dollar (for example).

The value of the stablecoin is pegged to the value of the underlying fiat currency. Examples of fiat-collateralized stablecoins include Tether (USD), TrueUSD (USD), and Paxos Standard (USD).

• Cryptocurrency-collateralized stablecoins: These stablecoins are backed by a reserve of another cryptocurrency, such as Bitcoin. The value of the stablecoin is pegged to the value of the underlying cryptocurrency, so one stablecoin may be worth a certain amount of Bitcoin. The value of the stablecoin is pegged to the value of the underlying cryptocurrency. Examples of cryptocurrency-collateralized stablecoins include DAI and MakerDAO.
• Algorithmic stablecoins: These stablecoins are not backed by any specific asset, but rather use algorithms to maintain their value. These algorithms may be designed to expand or contract the supply of the stablecoin in response to changes in demand, in an effort to keep the price stable.

One of the key benefits of stablecoins is that they can be used in the same way as traditional cryptocurrencies, with the added benefit of price stability. They can be used for a wide range of purposes, including as a store of value, for peer-to-peer payments, and for making purchases online and in physical stores.

There are also a number of potential applications for stablecoins in the financial industry. For example, they could be used to facilitate cross-border payments and international transactions more efficiently and at a lower cost than traditional financial systems. They could also be used by central banks as a tool for implementing monetary policy, or by businesses as a way to mitigate currency risk.

Overall, stablecoins represent an exciting development in the world of cryptocurrency, offering the potential for a more stable and predictable form of digital money. While they are still a relatively new and evolving technology, they have the potential to transform the way we think about and use money in the digital age.

FIAT-COLLTERIZED STABLECOINS.

Fiat-collateralized stablecoins are digital assets that are pegged to a specific fiat currency, such as the US dollar or the euro. They are backed by a reserve of that fiat currency, and the issuer of the stablecoin claims that it holds an equivalent amount of the reserve currency in reserve. The value of the stablecoin is meant to remain stable, as it is pegged to the value of the underlying fiat currency.

One example of a fiat-collateralized stablecoin is Tether (USDT). Tether claims to be backed by a reserve of US dollars and is designed to maintain a 1:1 peg with the US dollar. This means that 1 USDT is intended to be worth exactly 1 US dollar at all times. Tether has been highly controversial, however, and there have been questions about whether it is actually fully backed by reserves.

Other examples of fiat-collateralized stablecoins include TrueUSD (TUSD) and Paxos Standard (PAX). These stablecoins also claim to be backed by reserves of US dollars and are designed to maintain a stable value relative to the US dollar.

USDT.

USDT is a cryptocurrency that is pegged to the value of the US dollar. It is issued by a company called Tether, which claims that each USDT token is backed by one US dollar held in reserve. USDT is primarily used to facilitate the transfer of national currencies, particularly the US dollar, between cryptocurrency exchanges.

The mechanism that USDT uses to maintain its peg to the US dollar is not fully transparent. Tether has claimed that it holds a reserve of US dollars to back the USDT in circulation, but it has not provided sufficient evidence to prove this. As a result, there have been questions and concerns about the stability of USDT and its ability to maintain its peg to the US dollar.

Tether is a company that was incorporated in the British Virgin Islands and is headquartered in Hong Kong. It was founded in 2014 by Brock Pierce, Reeve Collins, and Craig Sellars. Tether has faced controversy and regulatory scrutiny in the past, and it is currently the subject of a number of ongoing legal cases. Tether has been controversial in the cryptocurrency community due to concerns about its lack of transparency and allegations that it may not be fully backed by US dollars as claimed.

One of the main controversies surrounding Tether is the lack of a thorough audit to confirm that it is fully backed by US dollars. Tether has claimed that it holds a reserve of US dollars that is equal to the amount of Tether in circulation, but it has not provided a comprehensive audit to verify this claim. This has led to speculation that Tether may not be fully backed by US dollars, and that its issuance may be used to manipulate the price of Bitcoin and other cryptocurrencies.

In addition to these concerns, Tether has also faced allegations of mismanagement and insider misconduct. In 2019, the New York Attorney General’s office filed a lawsuit against Tether and Bitfinex, alleging that they engaged in a cover-up to hide the loss of hundreds of millions of dollars of client and corporate funds. The case is ongoing.

It’s worth noting that Tether has denied these allegations and has maintained that it is fully backed by US dollars. However, the lack of transparency and the ongoing legal proceedings have contributed to the controversy surrounding the stablecoin.

BUSD

BUSD is a stablecoin that is pegged to the US dollar and is issued by Binance, one of the largest cryptocurrency exchanges in the world. BUSD is an ERC-20 token that is built on the Ethereum blockchain, and it is designed to be a stable, digital alternative to the US dollar.

Launched in September 2019, Binance USD (BUSD) is a fiat-collateralized stablecoin launched in collaboration between Binance and Paxos. BUSD is the first stablecoin launched as part of Binance’s Venus project. BUSD is issued by Paxos, a New York-regulated financial institution. Led by CEO and Co-Founder Charles Cascarilla, the Paxos team consists of individuals from various backgrounds and experiences ranging from Wall Street to Silicon Valley.

BUSD was built to improve the larger financial ecosystem by creating a frictionless global network where digital assets can be mobilized with significantly increased speed, flexibility, and accessibility.

BUSD is intended to be fully backed by US dollars held in reserve by Binance. In order to ensure the integrity of the reserve and the stability of the BUSD token, Binance has partnered with Paxos, a financial technology company that is regulated by the New York State Department of Financial Services (NYDFS). Paxos serves as the custodian of the BUSD reserve and is responsible for conducting regular audits to confirm that the reserve is fully funded.

BUSD can be used to buy and sell cryptocurrencies on the Binance platform, as well as to make purchases from merchants that accept it. It is also available for trading on other cryptocurrency exchanges and can be held in a variety of cryptocurrency wallets.

USDC

USDC (USD Coin) is a stablecoin that is pegged to the US dollar and is issued by Coinbase, one of the largest and most well-known cryptocurrency exchanges in the world. USDC is an ERC-20 token that is built on the Ethereum blockchain, and it is designed to be a stable, digital alternative to the US dollar.

USDC is intended to be fully backed by US dollars held in reserve by Coinbase. In order to ensure the integrity of the reserve and the stability of the USDC token, Coinbase has partnered with Circle, a financial technology company that is regulated by the US Securities and Exchange Commission (SEC) and the Financial Crimes Enforcement Network (FinCEN). Circle serves as the custodian of the USDC reserve and is responsible for conducting regular audits to confirm that the reserve is fully funded.

USDC can be used to buy and sell cryptocurrencies on the Coinbase platform, as well as to make purchases from merchants that accept it. It is also available for trading on other cryptocurrency exchanges and can be held in a variety of cryptocurrency wallets.

Circle is a financial technology company that is focused on the development and use of blockchain technology and cryptocurrencies. The company was founded in 2013 by Jeremy Allaire and Sean Neville, and it is headquartered in Boston, Massachusetts.

One of Circle’s main products is the USDC stablecoin, which is pegged to the US dollar and is built on the Ethereum blockchain. Circle serves as the custodian of the USDC reserve and is responsible for conducting regular audits to confirm that the reserve is fully funded.

In addition to USDC, Circle also offers a range of other products and services related to blockchain and cryptocurrency, including a cryptocurrency exchange, a peer-to-peer payment platform, and a suite of tools for developers. The company has received significant backing from investors, including Goldman Sachs and Bitmain, and has a valuation of over $3 billion.

CRYPTOCURRENCY-COLLTERIZED STABLECOINS.

Cryptocurrency-collateralized stablecoins are a type of stablecoin that is pegged to a specific fiat currency, such as the US dollar, and is backed by collateral in the form of cryptocurrency. The value of the stablecoin is intended to remain stable, and the cryptocurrency collateral is meant to serve as a buffer to help stabilize the value of the stablecoin. The idea is that if the value of the stablecoin falls below the value of the collateral, the issuer can sell some of the collateral to buy back the stablecoins, thereby maintaining the peg. If the value of the stablecoin rises above the value of the collateral, the issuer can issue more stablecoins, backed by additional collateral, to meet demand. This process is known as “overcollateralization.” Overcollateralization refers to the practice of holding more collateral than is needed to back the stablecoin in circulation. This excess collateral serves as a buffer to help stabilize the value of the stablecoin and ensure that it remains pegged to its target currency. For example, if a stablecoin is pegged to the US dollar and is backed by $1 of collateral for each stablecoin in circulation, the stablecoin would be fully collateralized. If the issuer holds $1.50 of collateral for each stablecoin in circulation, the stablecoin would be overcollateralized by 50%.

The amount of overcollateralization can vary depending on the issuer and the specific stablecoin. Some stablecoins may be overcollateralized by a small amount, while others may be overcollateralized by a large amount. The goal of overcollateralization is to provide a buffer against price fluctuations and help ensure the stability of the stablecoin.

DAI.

Dai is pegged to the US dollar and is backed by collateral in the form of Ethereum (ETH). Users can collateralize their ETH by depositing it into a smart contract, which issues a corresponding amount of Dai. The value of the Dai is intended to remain stable at or near $1.

To maintain the peg, the MakerDAO system uses a combination of overcollateralization and a feedback mechanism called the “Dai Savings Rate” (DSR). If the value of the Dai falls below $1, the DSR is increased, which encourages users to hold onto their Dai rather than sell it. This helps to increase the demand for Dai and stabilize its value. On the other hand, if the value of the Dai rises above $1, the DSR is decreased, which encourages users to sell their Dai. This helps to increase the supply of Dai and stabilize its value.

MakerDAO was founded in 2014 by Rune Christensen, a Danish entrepreneur and software developer. The first version of the MakerDAO system, called Single Collateral Dai (SCD), was launched in 2017. SCD was a cryptocurrency-collateralized stablecoin that was pegged to the US dollar and was backed by collateral in the form of Ethereum (ETH).

In 2019, MakerDAO launched Multi-Collateral Dai (MCD), which expanded the types of assets that could be used as collateral to include other cryptocurrencies and stablecoins. MCD also introduced the concept of “stability fees,” which are fees that are paid by users who borrow Dai and are used to incentivize the supply and demand for Dai and maintain its peg to the US dollar.

In 2020, MakerDAO launched Maker Savings (MDS), which allows users to earn interest on their Dai by holding it in a savings account. MDS is designed to help stabilize the value of the Dai and make it more attractive to users as a store of value.

MakerDAO has become one of the leading stablecoin projects in the cryptocurrency industry, with a strong track record of stability and a large user base. It has also received significant backing from the venture capital community, with over $60 million in funding from investors such as Andreessen Horowitz, Polychain Capital, and Coinbase Ventures.

ALGORITHMIC STABLECOINS.

Algorithmic stablecoins are a type of cryptocurrency that are designed to maintain a stable value relative to a specific asset, such as the US dollar. They are called “algorithmic” because they use algorithms and smart contracts to automatically adjust their supply in order to maintain stability.

There are several different approaches to designing algorithmic stablecoins. One common approach is to use an algorithm that adjusts the supply of the stablecoin based on demand, similar to the way central banks manage the supply of traditional fiat currencies. Another approach is to use a collateralized stablecoin, where the value of the stablecoin is backed by a reserve of assets (such as cryptocurrency or fiat currency).

Algorithmic stablecoins have several potential advantages over traditional stablecoins, which are often backed by physical assets such as gold or real estate. They can be more transparent, since the algorithms and smart contracts used to manage the supply of the stablecoin can be publicly audited. They can also be more efficient, since they do not require the use of physical assets as collateral.

One potential disadvantage of algorithmic stablecoins is that they rely on complex algorithms and smart contracts to maintain stability, which can be difficult for some users to understand. They may also be vulnerable to attacks or malfunctions if the algorithms or smart contracts are not implemented correctly.

Overall, algorithmic stablecoins represent an innovative approach to creating stable, digital assets, and they have the potential to transform the way that value is stored and transferred online.

Some potential advantages of algorithmic stablecoins include:

Transparency: Algorithmic stablecoins are often designed in a transparent manner, with the algorithms and smart contracts that govern their supply being publicly auditable. This can increase trust in the stablecoin and make it easier for users to understand how it is being managed.

Efficiency: Algorithmic stablecoins do not require the use of physical assets as collateral, which can make them more efficient than traditional stablecoins. This can reduce costs and make it easier for the stablecoin to scale.

Flexibility: Algorithmic stablecoins can be designed to maintain a stable value relative to a wide range of assets, including fiat currencies, commodities, and other cryptocurrencies. This can give users greater flexibility in terms of the assets they can hold or transact with using the stablecoin.

Automation: Algorithmic stablecoins use algorithms and smart contracts to automate the process of maintaining stability, which can reduce the need for manual intervention. This can make the stablecoin more reliable and efficient.

Programmability: Algorithmic stablecoins can be programmed to perform certain functions or trigger certain events based on certain conditions being met. This can make them more versatile and useful in a wide range of applications.

Whatever has a good side definitely would have a bad side, and in this case, Algorithmic stablecoins have proved us right over the last few months. We will look at the scenario of UST, an algorithmic stablecoin by Terra Labs. But first, let’s take a look at the downsides of algorithmic stablecoins:

Complexity: Algorithmic stablecoins rely on complex algorithms and smart contracts to maintain stability, which can be difficult for some users to understand. This can make them less accessible to some users, especially those who are less tech-savvy.

Vulnerability to attacks: If the algorithms or smart contracts governing an algorithmic stablecoin are not implemented correctly, the stablecoin may be vulnerable to attacks or malfunctions. This can lead to loss of value or trust in the stablecoin.

Dependence on technology: Algorithmic stablecoins rely on technology to function, which means that they are subject to the risks and challenges associated with the use of technology. This can include issues such as technical failures, cybersecurity breaches, or regulatory challenges.

Limited adoption: Algorithmic stablecoins are still a relatively new and untested technology, which means that they may have limited adoption compared to more established stablecoins or traditional fiat currencies. This can make it harder for users to find places to spend or use the stablecoin, which can limit its utility.

Regulatory challenges: Algorithmic stablecoins may face regulatory challenges in some jurisdictions, especially if they are perceived as a threat to traditional financial systems. This can create uncertainty and make it harder for the stablecoin to gain traction.

Rebase-style Stablecoins deal with price volatility. ERC-20 tokens, i.e., a stablecoin’s total supply is not fixed and is adjusted on a regular basis. Instead, the correction is carried out automatically through the rebase process, which gradually stabilizes the price of a target stablecoin against a preset peg, such as $1.

Rebasing is a feature of the Ampleforth protocol that modifies the token supply. This means that the number of AMPL tokens in your wallet will change every 24 hours based on the weighted average of the token price during that time period.

The seigniorage share model for algorithmic stablecoins generally consists of two types of cryptocurrencies: stablecoin (coins) and seigniorage ownership (shares). When the value of a currency surpasses its intended peg, shares are used to boost coin supply.

In addition to these two cryptocurrencies, seigniorage-style stablecoins typically issue a redeemable bond as an incentive for buyers when the price falls below the peg. Basis Cash is a seigniorage-style algorithmic stablecoin initiative made up of three cryptocurrencies.

The Basis Cash protocol’s overall purpose is to maintain the price of BAC steady by modifying supply. The system works as follows: When the value of basis cash exceeds $1, the protocol creates new tokens and distributes them among BAS holders. This increases the selling pressure, causing the price to fall.

When Basis Cash falls below its $1 peg, the system pushes users to burn their tokens in exchange for 1:1 bond tokens. Users can exchange their bond tokens for Basis Cash tokens whenever the token’s price peg increases above $1.

The characteristics of fully-algorithmic and fully collateralized stablecoins are combined in fractional-algorithmic stablecoins. These stablecoins are less likely to be over-collateralized and have lower custodial concerns. It is intended to establish a rather tight peg with a higher level of stability, as opposed to simply computational designs.

Frax is the first stablecoin implementation to employ the partial-collateral protocol, which enables a two-token design with FRAX serving as a $1-pegged stablecoin and FXS serving as a governance token.

It’s important to note that stablecoins, like any other financial product, carry risks and may not be suitable for all investors. It’s always a good idea to do your own research and due diligence before investing in any stablecoin or other cryptocurrency.

Thank you for reading, we hope you have more understanding about Stablecoins now.

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