What are Stable Coins and it's types?

Before we directly dive into types of stable coins , it is essential to know what stable coins are and their importance .

Why do we need stable coins and what is it’s importance ? The arrival of cryptocurrency marked as the new financial instrument . After the arrival of crypto currencies , Investors and traders in crypto space has amassed a huge fortune overnight and also has lost over-night too . Cryptocurrency and volatility comes hand in hand .

Recent example of crash is Luna Coin . Luna once was traded at 119$ and it crashed to less than a dollar in just 48 hours. And current fresh example of crypto crash is FTX Exchange . Seeing all this scenario it become essential to have stable coins in crypto space.

So what are Stable Coins ?

"Stable Coins are cryptocurrencies whose value are pegged against some stable assets such as precious metal or fiat currency or crypto assets . " The different stable coin categories are basically indicative of the assets backing them.

History of Stable Coin . Since the Beginning of internet there has been demand to take fiat currency digital and thus reduce it’s permission.
Charles Hoskinson and Dan Larimer. Launched first stable coin called BITUSD in the year in the year 2014 . . It was issued as a token on Bit Share Blockchain .
The token was backed by core token of Bit Share , and was collateralized by a range of other cryptos – all locked in smart contract to act as collateral . Then after Tether (USDT ) and many other stable coins were launched . Today there are over approximately 200 stable coins .

Types of Stable Coins . Currently there are four types of Stable Coins . 1) Fiat – Collateralized Stable Coins . 2) Commodity – Backed stable Coins . 3) Crypto – Backed Stable Coins. 4) Non – Collateralized /Algorithmic stable Coins.

1) Fiat – Collateralized Stable Coins .

Fiat- collateralized are for-most and most used stable coins among all the stable coins . Fiat – based stable coins are pegged by fiat currency such as Euros, US dollars etc . Fiat – based stable coins are most simplest stable coins backed by 1:1 ratio of fiat currency. which means 1 stable coins is equal to one unit of fiat currency such as US dollars , euros etc . For example if there is supply of 100 stable coins then there must be 100 unit of fiat Currency of US dollars , euros etc as reserved value . Fiat-backed stable coins are one of the simplest stable coin categories due to their structural advantage. The stability of the country’s economy ensures limited fluctuation in the value of stable coin. Ex : Tether(USDT) . Tether refers to the US Tether, which is pegged against the US dollar on a 1:1 ratio . Coin Gecko has reported that the overall market capitalization of Tether amounts to more than $32 billion.

2 ) Commodity – Backed stable Coins .

As the Name says Commodity – Baked stable coins are backed by precious metals such as gold . Stable coin tend to offer better incentives for people holding and using commodity-backed stable coins. Furthermore, commodity-collateralized stable coins also enable the possibility for anyone in the world to invest in precious metals such as gold.

Traditionally, such commodities were restricted only to the financially privileged class. However, commodity-backed stable coins create new opportunities in investment for the average person, irrespective of geography. The most common example of commodity-backed stable coin refers to Digix Gold or DGX. It is basically an ERC-20 token developed on the Ethereum network with the backing of physical gold.

Digix Gold shows the perfect illustration of commodity-backed stable coin types by pegging one DGX against one gram of gold. The gold remains in reserve in Singapore while undergoing audits for a period of three months to ensure transparency   .

3 ) Crypto – Backed Stable Coin . The first question arises that as crypto coins are highly volatile , How can one ensures the stability of coin which is backed by crypto assets. As a matter of fact, crypto-collateralized stable coins offer better decentralization in comparison to fiat-collateralized stable coins. Crypto – collateralized stable coins are backed by other cryptocurrencies . Because the reserved crypto currency may also prone to be high volatility , Such stable coins are over collateralized , which means value of crypto currency held in reserves exceeds the value of stable coins . A crypto currency worth of 2 million dollars might be held as reserve to issue 1 million dollar stable coins. Insuring against 50% decline in the price of reserve crypto currency .

For ex : DAI stable coin is pegged to US dollar but backed by ethereum and other cryptocurrencies worth 150% of the DAI stable coin in circulation .

  4 ) Non – Collateralized / Algorithmic Stable coins . Non – Collateralized / Algorithmic Stable coins do not hold any backed fiat currency or commodity or crypto assets . The non-collateralized or algorithmic stable coins follow an algorithm for controlling the stable coin supply . With the rise in demand, new stable coins will be created to reduce the price to the normal level. Basically, algorithmic stable coins could offer stability according to the tenets of market supply and demand .
It is worthy to note that Algorithmic stable coins features highest level of decentralization .

Ex : Neutrino Usd

Future of Stable Coin . The Purpose of Stable coins goes beyond just a financial contract. It is the evolution of both convential payment system and traditional Volatile crypto curriencies . It’s the new form of digital money .
Controlled algorithmically instead of by a central authority and offers same monetary benefits as fiat currency . Stable Coins has huge potential to change global payment system .