Cryptocurrencies have revolutionized finance, but do you know about stablecoins? Find out everything you need to know about crypto stablecoins.
What is a stablecoin?
Stablecoin is a type of cryptocurrency designed to maintain a stable value relative to a specific asset, such as the US dollar or gold. This stability is achieved through various mechanisms, such as holding a reserve of the underlying asset, or by using algorithms to control the supply of the stablecoin.
As a result, stablecoins offer stability and security to investors. This makes them an attractive investment option for those looking to benefit from the cryptocurrency market's growth potential while also mitigating risk.
In this article, we’ll look at different types of stablecoins and some best stablecoin FAQs.
What are the different types of Stablecoins?
Stablecoins are cryptocurrency designed to minimize volatility and preserve value. As compared to other cryptocurrencies, stablecoins offer increased stability and reliability, making them an attractive option for investors and traders alike. In this guide, we'll explore the various types of crypto stablecoins available today.
Fiat-backed stablecoins
Fiat-backed stablecoins are one of the most popular crypto stablecoins. These coins are backed by an underlying asset in a fiat currency, such as the US dollar (USD) or EUR.
These coins are generally pegged to their corresponding fiat currency at a 1:1 ratio. One unit of a cryptocurrency will always equal one unit of its corresponding fiat currency. This ensures that their value remains relatively consistent over time and is less subject to market fluctuations. Because of this, Fiat-backed stablecoins are attractive for investors as it provides a safe and secure way to hold their assets.
Crypto-collateralized stablecoins
Crypto-collateralized stablecoins are another type of stablecoin. Unlike fiat-backed coins, they are backed not by fiat currency, but by other cryptocurrencies. These coins use a multi-layered approach to collateralization that involves securing the value of their underlying asset (in this case, a cryptocurrency) with additional assets. The result is an incredibly secure and reliable stablecoin resistant to market fluctuations. It can provide investors with assurance they need when investing in cryptocurrencies.
Non-Collateralized Algorithmic Stablecoins
Non-collateralized algorithmic stablecoins are a type of cryptocurrency that does not rely on fiat money or other collateral to maintain its value. Instead, its value is maintained through algorithms and smart contracts which effectively set a target “peg” rate for the coin which it then attempts to sustain by adjusting the amount of coins in the market. This helps ensure that regardless of market fluctuations, these algorithmic stablecoins remain at their intended peg rate.
Cross-chain Collateralization Stablecoins
Cross-chain collateralization is a technique used on multiple blockchains, such as the wrapper for Bitcoin, to ensure stablecoin value. By locking cryptocurrencies from one blockchain into another and creating standardized assets, you cover the risk associated with one specific chain. This ensures even more stability. As more users adopt this option, crypto stablecoin volatility will decrease significantly, allowing users to trust their assets will hold value.
Seigniorage Shares Stablecoin
Seigniorage shares stablecoins are a particular type of crypto-stablecoin that leverage seigniorage to maintain their peg rate. They achieve this through selling and buying tokenized shares of different digital assets, thus allowing holders to earn dividends from time to time. These dividends are distributed among all holders proportional to the amount of coins they own. This helps incentivize investors and ensures stability in their value.