In one way or another, we have heard what cryptocurrency is.
To some, they have been exposed to these and it comes in many forms such as coins and token which are prevalent in the market.
Each of these currencies has specific properties, rewards system, and functions.
Let’s get introduced to a quite unpopular, if not totally expounded word: stable coins.
Introduced in 2014 by Tether, they are a cryptocurrency that is priced as “stable”. They have a fairly low-price fluctuation and volatility (in normal market setup). They are asset-backed, mostly by fiat currencies yet in some instances, they are traded with either metals or gold.
Public trust is earned with this.
The core unique selling point of cryptocurrency is decentralization.
On the other side of the spectrum for stable coins, there are synonymous with the various distributed ledger technologies in the market nowadays.
But we have known three major mechanisms and these are:
1. Centralized IOU issuance: an informal yet essential liability document between two parties, with small effort in relation to legal and not subject to reconciliation, should dispute or concerns arise.
As an example, the main man behind stable coins became free at a time when the policies ruling over such methodologies were not blurred and has the tendency to go back to the usual regulations.
But contrary to them, this has to be more centralized, because the token issuer has oversight of the backed asset, also known as asset-backed off-chain.
These mandates trust in a centralized third party to hold the inclusion. As a result, we can resemble it to a bank setup.
Collateral-backed: this model is supported by other non-stablecoin like Ethereum, Bitcoin, etc. This model is the riskiest because of the instability of the market.
Many people impose that stable coins should be collateralized.
For example, if you own a token for $1 worth of Ethereum, the issuer should be than $1 worth of Ethereum for you to get at least the middle level. Thus, create a high risk for the user. Some collateralized stable coins are BitUSD and DAI.
Seigniorage shares: these kinds are not collateral. but a mix of algorithms and smart contracts is employed to sustain price balance. Often called the “quantity theory of money”, which means a shortage of money, print more.
In case you will wonder, the “seigniorage” refers to the profile made by the governments by releasing money, with differentiation in face values for coins and production expenses.
Overall, stablecoin are digital currencies that wraps the investor peace of mind into one safe place: they are free of high volatility, making it a fungible asset.
In addition, all benefits synonymous like in blockchain can be summed up to this: pseudo-anonymous, borderless, low-fee remittance, frictionless when handled accordingly.