What are stablecoins: types, examples and more

(Photo: Image by Jae Rue from Pixabay)

Gone are the days when the first and probably the only thing that comes to people’s minds when they hear the word cryptocurrency is Bitcoin. Gone are the days when most people scratch their heads and wonder what the world is cryptocurrency.

With the boom in the crypto market, more and more people are getting into it. Now there are things like altcoins, same coins, and even stablecoins.

We’ve already talked about what meme coins are here on Tech Times, so let’s look at another kind of cryptocurrency, stablecoins.

What is cryptocurrency?

Before we dive deeper into what stablecoins are, let’s first define what cryptocurrency is.

Cryptocurrency is pretty much a digital currency that uses cryptography to secure transactions and prevent counterfeiting. Popular examples of crypto include Bitcoin, Ethereum, and Binance.

It is important to note that cryptocurrency is fungible, which means that one Bitcoin, for example, can be exchanged for another Bitcoin. In contrast, non-fungible tokens (NFTs), which are typically associated with cryptocurrency, cannot be exchanged for anything of equal value.

There are different types of crypto available in the market, including stablecoins.

Associated article: NFT vs Cryptocurrency: are they the same?

What are Stablecoins?

A stablecoin was defined by Investopedia as “a class of cryptocurrencies that attempt to provide price stability and are backed by a reserve asset”. Cryptocurrencies are generally known for their unstable volatility, and stablecoins are seen as an alternative to the usual crypto options available.

Investopedia adds that stablecoins “attempt to offer the best of both worlds – instant processing and security or privacy of cryptocurrency payments, and stable valuations without volatility of fiat currencies.”

Popular examples of stablecoins include Tether, USD Coin, Binance USD, and Dai.

Types of stable coins

There are different types of stablecoins available depending on the asset that supports them and gives them a semblance of stability. According to Benzinga, here are the types of stablecoins currently available: stablecoins backed by commodities, stablecoins backed by cryptocurrencies, stablecoins backed by trust funds and seigniorage-style stablecoins.

Commodity-backed stablecoins

Commodity-backed stablecoins are those that are “stabilized with durable assets such as gold or real estate,” according to Benzinga. Gold is often used for stablecoins backed by commodities, but other metals have also been used.

Tether Gold and Paxos Gold are examples of commodity-backed stablecoins.

Cryptocurrency-backed stablecoins

Cryptocurrency can also be used to support other cryptocurrencies. This type of stablecoin usually circulates with a lower bid.

An example of a cryptocurrency backed stablecoin is Wrapped Bitcoin.

Stablecoins backed by Fiat

Fiat-backed stablecoins are cryptocurrencies backed by fiat curries such as the US dollar. According to Benzinga, precious metals such as silver and platinum can also be considered fiat.

Examples of stablecoins backed by trust funds are USD Coin and Tether coins. Both have their prices tied to the US dollar.

Seigniorage style stablecoins

Seigniorage style stablecoins, also known as algorithmic stablecoins or unsecured stablecoins, are those that are backed by some algorithm, process, or even a working mechanism to keep their prices stable.

Read also: US Treasury wants Stablecoins to be issued by banks

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Written by Isabelle James

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