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Stablecoins: concept, types and essence of work

Sep 11, 2022
What are stablecoins. Types of stablecoins by collateral.
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Stablecoins - digital assets that are pegged to the value of other currencies such as the US dollar, Euro, gold and other currencies.

Stablecoins are used to buy and sell cryptocurrencies, as well as a means of savings.

Types of stablecoins:

1 Traditional сollateralized stablecoins
2 Cryptocurrency-backed stablecoins
3 Algorithmic stablecoins
4 Commodity-backed stablecoins

Traditional сollateralized stablecoins

Stablecoins are backed 1:1 by fiat currency, securities or bills. As a rule, they have a centralized control.

The most famous are Tether (USDT), USD Coin (USDC), True USD (TUSD) and Paxos Standard (PAX).

Cryptocurrency-backed stablecoins

This type of stablecoin is backed by another cryptocurrency as collateral. This process takes place within the network through smart contracts.

An example of a DAI stablecoin - to issue $1,000 DAI, you must collateralize $2,000 of Ethereum.

Algorithmic stablecoins

The price of the coin depends on the use of specialized algorithms and smart contracts.

The algorithmic stablecoin system will decrease the number of tokens in circulation when the market price falls below the price of the monitored fiat currency and increase when the price rises.

An example of a former UST stablecoin on the TerraLuna network

Commodity-backed stablecoins

Commodity-backed stablecoins are backed by physical assets such as precious metals, oil and real estate.

The two most liquid gold-backed stablecoins are Tether Gold (XAUT) and Paxos Gold (PAXG).

TOP5 stablecoins by capitalization:

  1. Tether USDT - $67,5 billion;
  2. USD Coin USDC - $51,8 billion;
  3. Binance USD BUSD - $19,4 billion;
  4. Dai DAI - $6,9 billion;
  5. TrueUSD TUSD- $1,22 billion.

Risks in stablecoins:

  • Risk of wallet or exchange being hacked;
  • Counterparty risk;
  • Collateral risk.

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