Stablecoins are tokens that lack the volatility of conventional cryptocurrencies and therefore can be used as an analogue of fiat money in the blockchain sector.
Stablecoins are usually classified by the way they underpin their stability. Based on this, the following varieties can be distinguished:
Backed by fiat. As an example, the most popular stablecoin is USDT. Issued based on real US dollars contributed by the investor. The collateral is held in the company’s bank accounts or in the form of bonds and other similar instruments.
Backed by commodities/precious metals. There are, for example, stablecoins backed by gold and, accordingly, dependent on the value of this asset.
Backed by cryptocurrencies. Instead of fiat, the investor deposits a cryptocurrency, for example, ether. The volume of resulting tokens is determined by the current market rate of the cryptocurrency.
Unsecured, or algorithmic. The exchange rate is adjusted based on algorithms that track the balance of supply and demand. If demand exceeds supply, new coins are minted, and if vice versa, then part of the coins is redeemed and burned.
From this list, the first ones are the most stable in terms of cost, the price practically does not fluctuate. But they just belong to the centralized ones, which means they have their own risks. The latter are the least stable. Significant price fluctuations are possible. It is the last two options that will be discussed today.