What is stablecoin and its types

Have you observed the kind of volatility that exists in crypto space? Irrespective of the volatility there are cryptocurrency that have stable value. They are called stablecoin but what is stablecoin? 

The primary aim of cryptocurrency is to create a medium of payment that is independent of any government. This led to various research and term papers which eventually produced the Bitcoin blockchain in 2008.

Since then there has been continuous innovation by applying blockchain technology to more complex financial systems and other areas apart from finance.

As bitcoin becomes more widely used, its price starts fluctuating in response to the forces of demand and supply.

The fluctuation therefore pushes bitcoin to become more of a store of value than as a medium of exchange.

To maintain the primary aim of creating cryptocurrency and maintain price volatility, blockchain technology was used to create another dimension of cryptocurrency with stable value called stablecoin.

What is stablecoin?

In simple terms, stablecoin is any cryptocurrency with stable value.

A stable coin is a type of cryptocurrency whose value is pegged to other assets such as fiat currency, gold among others.

Types of stablecoin 

Fiat-collateralized stablecoin 

These are stable coins whose value are pegged to fiat.

Fiat currencies are government-issued currencies which are considered legal tender in various countries. For example USD, Euro, Naira etc.

Due to the nature of fiat currency, their prices are stable even though the purchasing power can be reduced over time.

Fiat-collateralized stablecoins maintain a reserve of a fiat currency such as USD as collateral.

Examples are Tether (USDT), TrueUSD (TUSD), Binance USD (BUSD) among others.

Crypto-collateralized stablecoin 

These are stablecoins whose value are backed by another cryptocurrency.

Due to price volatility of the cryptocurrency held as reserve, they are over collateralized.

For instance, if a fiat-collateralized stablecoin has a reserve ratio of 1:1, a crypto-collateralized stablecoin might have a 2:1 reserve ratio.

Example of crypto-collateralized stablecoin is MakerDAO’s DAI stablecoin that is pegged to US dollar but backed by ethereum and other cryptocurrencies worth 150% of the DAI in circulation.

Algorithmic stablecoin 

These are stablecoins which are created and maintained based on algorithmic formulas.

An algorithmic stablecoin may or may not hold any asset. It maintains its stable value due to a preset formula that automatically determines its supply.

From time immemorial, algorithmic stablecoins has not been able to stand the test of time compared to fiat and crypto-collateralized stablecoin.

Example of algorithmic stablecoin is TerraUSD (UST) which depegged and contributed to the LUNA crisis 

Stablecoins backed by precious metals 

This is an imitation of what brought about paper money.

Before the great depression of 1929, fiat currencies were backed by gold which is called the Gold Standard.

Stablecoins can also be backed by precious metals such as gold, silver but the most used asset is gold.

Example is Tether gold which is backed by gold. Other examples are Paxos Gold (PAXG), Goldcoin (GLC) 

Do you want to learn more about blocking technology and cryptocurrency? Check-out Kumo Academy.

Do you miss any of this?

Basics of blockchain technology 

History of blockchain technology

What is smart contracts 

Introduction to cryptocurrency

Different types of cryptocurrency. 

About Kumo

Kumo, registered as Kumo Technologies Inc in Delaware, U.S. is a fiat and crypto social payment app which allows users to exchange fiat (NGN) to crypto, save and earn interest in dollar with as low as $5, utility payment such as DSTV subscription, airtime, data among others.

Kumo wallet is your all-in-one social payment app for seamless payment solutions.

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