Stablecoins, as the term suggests, are in fact stable cryptocurrencies, not exposed to that price fluctuation typical of the cryptocurrency market. But what makes them invulnerable to volatility? Below you will find a guide to the characteristics and main types of Stablecoin.
Stablecoin: what is it?
Stablecoins are therefore cryptocurrencies that, unlike bitcoin and its much-talked-about competitors, do not suffer from volatility. The reason is quickly said: stablecoins are linked to another financial asset.
An element of strength, this, since one of the criticisms that are traditionally made of bitcoin and other altcoins is precisely linked to the instability of their price, which could harm their use as a means of payment.
In short, Stablecoins retain the revolutionary components of cryptocurrencies while stripping them of their weaknesses: these virtual currencies evolve within the framework of decentralization dear to cryptos and their investors, but guarantee – at the same time – the high degree of stability that Bitcoin, Ethereum or Litecoin cannot offer.
Three types of Stablecoin
Depending on the financial asset to which they are linked, we can distinguish three types of Stablecoins:
Stablecoins linked to fiat currencies: some Stablecoins, to counter the risks of volatility, are linked to fiat currencies such as the dollar or the euro, or even gold. The process consists of depositing an escrow amount – in euros, dollars or pounds sterling, depending on the asset to which the Stablecoin is linked – in a bank account.
Stablecoins pegged to other cryptocurrencies: Some investors, however, want to break away from the traditional payment structure and use crypto assets as a guarantee of stability. Typically, these stablecoins are pegged to different cryptocurrencies to mitigate volatility risks.
Non-asset-backed stablecoins: There are also unbacked stablecoins. Also known as fiat stablecoins, these cryptocurrencies work like the fiat currencies of the traditional banking system: a sort of crypto central bank regulates the supply and demand of cryptocurrencies based on rules encoded in a smart contract.
What are the main stablecoins?
The best-known – and most widespread – stablecoin is Tether, created in 2015 under the name Realcoin. The stablecoin, managed by a central authority, Tether limited, is pegged to the dollar, the euro or the Chinese yuan.
The most traded stablecoin in the world, meanwhile, is TRUE USD, created in 2018. This cryptocurrency, pegged to the dollar, uses an erc20 token to be stored in a digital wallet and relies on smart contracts to certify the parity between reserves and issued tokens.
Next come Staxos Standard, a stablecoin created in 2018 and supported by the financial services department of the NYSE (New York Stock Exchange), and Digix Gold, a cryptocurrency pegged to gold – a token equal to one gram of the asset – that is based on the Ethereum blockchain.
Also worth mentioning in the list of the most popular and reliable stablecoins are Gemini Dollar, MakerDAO, USD Coin, bitUSD (pegged to the greenback), Statis EURO (pegged to the European currency) and Alchemint Stantards (pegged to the Singapore dollar).