With the increasing use and variety of stablecoins, people, especially novice investors, sometimes find it difficult to distinguish between tokens and stablecoins. For this reason, search engines are often searched for “Which of these is classified as a stablecoin?“. In an effort to produce a cryptocurrency token with a consistent price, stablecoins were developed. The token is frequently pegged to an asset, such as gold or fiat money, in order to attain this stability.
Comprehensive Stablecoin Guide: Which of These Is Classified as a Stablecoin? – 2023
Coins are primarily viewed as speculative investments due to the long- and short-term volatility of cryptocurrencies. Markets are more confident in stablecoin prices when more conventional investments support them. As a result, stablecoins are frequently chosen as the preferred alternative for financial decisions by institutional and retail cryptocurrency users.
What is a Stablecoin?
Stablecoin lowers price volatility by securing its value against a traditional asset. Several different currencies, one fiat currency, or other priceless assets could be the backing asset. Stablecoins work to reduce the speculative nature of digital assets and improve the acceptance of cryptocurrencies by establishing a stable and reliable environment. In short, they combine the security and decentralization of cryptocurrencies with the stability of fiat currencies to offer the best of both worlds.
Types of Stablecoins
The four primary categories of stablecoins on the cryptocurrency market are as follows.
Stablecoins Collateralized by Fiat
These stablecoin varieties are the most prevalent ones. One stablecoin can be traded for one unit of money because it is backed 1:1. Stablecoins that are backed by fiat money, such as the EUR, USD, or GBP, are referred to as collateralized. There is treasury-held fiat money to support each stablecoin that is in use. A fixed-price stablecoin is intended to be produced using fiat money in real bank accounts.
Despite being the most straightforward stablecoin category, it is also the most centralized. To oversee the issuance of tokens backed by fiat and the receipt of novel fiat, a central organization serves as the fiat reserve custodian.
Stablecoins Backed by Crypto
Stablecoins are also backed by cryptocurrencies, a stablecoin backed by crypto functions exactly like one backed by fiat. However, cryptocurrency is locked up as collateral that supports the crypto-backed stablecoin rather than utilizing money as collateral.
The stablecoin’s backing token makes use of a “security pledge” to offset price fluctuations. However, the token doesn’t have a 1:1 ratio for the underlying crypto collateral because it can’t maintain its peg.
Non-collateralized Stablecoins
To keep a token’s price consistent and anchored to an asset, this category employs stablecoins in the Seigniorage approach. An actual asset, like gold or U.S. dollars, could be the asset. These are non-collateralized algorithmic stablecoins. Stablecoins in the seigniorage model rely on algorithm-generated smart contracts to supply or sell tokens if the price changes relative to pegged assets.
Stablecoins Backed by Commodities
Commodity-backed stablecoins are collateralized by replaceable assets, such as precious metals, instead of algorithmic stablecoins. Gold is the most typical asset utilized to support these stablecoins. Some issuers, such as Daxos Gold and Kitco Gold, have their stablecoins set up to redeem coins for gold bars. However, stablecoins can also be backed by commodities like gold, oil, or other precious metals. The underlying asset is frequently kept in a reputable third party’s vault. A buyer of stablecoins has the option to redeem the coin for a commodity.
Popular Stablecoins
Here are some of the most popular stablecoins on cryptocurrency exchanges:
- Tether (USDT)
- Binance USD (BUSD)
- TrueUSD (TUSD)
- USD Coin (USDC)
- DAI
- Gemini Dollar (GUSD)
- BitUSD
- USD Digital (USDD)
The stablecoins listed above are the most preferred by users. This does not necessarily mean that these coins are the best. However, the fact that they are in such high demand should not be underestimated.
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