Stablecoins are digital currencies that imitate properties of traditional currency. Their exchange rates are tied to market prices of specific assets.
Why stablecoins are needed
They’re not at all volatile unlike other cryptocurrencies, while still keep the same advantages: transparency, reliability of transactions, privacy, low fees, and fast transactions.
Types of stablecoins
Stablecoins can be one of several types: collateralized and non-collateralized.
Collateralized tokens are tied to valuable assets. Stablecoins may be tied to traditional assets: fiat currency — USD, Euro, Ruble, etc. (examples include USDT, USDC, HUSD), physical goods such as gold (examples include DGX, PAXG, XAUT), or crypto assets a.k.a. backed with other cryptocurrencies (DAI is supplied by ETH, UST is supplied by Luna).
Stablecoins tied to fiat currency are centralized and controlled by one company (or more) that also acts as an issuer. To maintain trust and reputation, audits are required (to confirm that stablecoins are reserved with real assets). If a stablecoin is backed by a traditional currency, all the law restrictions and risks of the actual currency dropping in value apply to it.
Non-collateralized stablecoins aren’t tied to the value of other assets. USD works the same way: 50 years ago, it stopped being tied to the gold standard, but it’s been stable to this day because people believe in its value.
The stability of such cryptocurrencies is backed by seigniorage — profits that emerge from the currency’s printing and go to an issuer. Once demand rises, new stablecoins are minted to stabilize its price. If demand drops, coins are bought to lower the volume of that currency in circulation. Theoretically, the price stays stable, it’s controlled by supply and demand.
This is the more decentralized and independent form of stablecoin. An example of such a coin is Ampleforth (AMPL), which was launched at the end of 2018. Its algorithms control supply and demand daily to avoid volatility that backed cryptocurrencies are prone to.
Stablecoin use cases
- Common financial tasks
- Borderless transfers and payments
- Fast and accessible transfers
- Quick and accessible way to buy and sell crypto
Stablecoins on Minter
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