31/3/2023
Archblock

Are All Stablecoins Created Equal?

By now, most of you have seen the headlines in 2022 on what unfolded with USD Terra (UST), the corresponding cryptocurrency Luna and may think that most other stablecoins could suffer the same fate.

In this post, we start by unpacking the fundamentals behind the various different models of stablecoins.

What are stablecoins?

Stablecoins are a category of cryptocurrency that offer price stability due to their value being pegged to the value of a stable asset such as precious metal (e.g. gold) or currency (e.g. the Australian Dollar). Where other stablecoins use algorithms to continually adjust their supply and demand in order to maintain the price peg.

What are the different types of stablecoins?

There are four prominent types of stablecoins, each categorised by their own mechanism of maintaining the value of the stablecoin. These include:

Currency backed:

These stablecoins are pegged on a 1:1 ratio to the currency of a particular country. One example of a currency backed stablecoin is TrueUSD (TUSD) which is pegged to the US Dollar.

Commodity backed:

As the name suggests, these stablecoins are pegged to the value of precious metals such as gold or silver to stabilize its value which is held in collateralised reserves.

Over collateralized, cryptocurrency backed:

At a high level, these stablecoins are backed by the combined value of multiple cryptocurrencies such as Bitcoin, Ethereum and / or other stablecoins. They are often over-collateralized (as a mixed basket of assets) to account for price fluctuations.

Algorithmic:

This category of stablecoin uses algorithms to adjust the supply based on its market demand. More specifically, these algorithms would burn (permanently remove coins from circulation) or mint new coins based on the fluctuating demand for the stablecoin hence ensuring the value remains stable.

How are currency backed stablecoins different?

In our next post, we dive deeper into the various nuances and attributes of currency backed stablecoins in light of what’s transpired recently in relation to the depegging of various currency backed stablecoins.

Are All Stablecoins Created Equal? was originally published in Archblock on Medium, where people are continuing the conversation by highlighting and responding to this story.

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