Types of Stablecoin which not pegged only Fiat Currency
Stablecoins have been recognized to be an alternative for less volatile investment in the crypto world. Though most are pegged to worldwide currencies, it is becoming increasingly common for investors to find stablecoins pegged to other variations of currencies and assets, further enhancing its stable, yet highly unique state.
Today Bitkub Academy will take you on a ride through the world of stablecoins and their ability to peg its value to various coins and answer vital questions such as “What is the difference between each pegged stablecoin?”
What are Stablecoins?
Stablecoins, as mentioned beforehand, are stable variations of cryptocurrencies that can be utilized in trade/payments or goods and services. Stablecoins are different from other digital assets in the aspect of how they are stable and much less volatile in prices and value. Also, stablecoins derive their stability from pegging its value to various currencies around the world, as well as gold and other cryptocurrencies.
Stablecoins are known to be individualistic. In a deeper view of the market, investors can often see the price relationships between Bitcoin and various Altcoins, wherein Bitcoin would be the deterrent for price changes in the market. However, stablecoins aren’t involved in these fluctuations.
How do stablecoins peg their value?
To stay stable, stablecoins are backed by various other assets and their values.
In general, they are known to be backed by fiat currencies, however, with the modern day variations, stablecoins are now becoming increasingly popular after new tokens/coins have appeared with values pegged to other currencies or assets, further drawing in the attention of investors. Such assets can include gold, property, and other cryptocurrencies themselves, which can fall under the fields of interest of investors.
Moreover, another uplift for stablecoins is they have become increasingly functional in the DeFi world, enhancing the usage of both digital assets and stablecoins themselves.
Fiat currency is the go-to currency for stablecoin pegging. Such currencies include the U.S. dollar or Euro. Stablecoins are backed at a 1:1 ratio (ie. 1 USDT = 1 USD). By doing so, stablecoins’ values would fluctuate in accordance with the pegged fiat currency's current value themselves, which would be affected by the world’s markets and economies.
It is notable that the most commonly pegged currencies for stablecoins are the USD, EUR, and GBP. The stablecoin developers themselves are required to reserve funds of that specifically chosen pegged currency in order to allow immediate transfers, withdrawals, or deposits on the users’ behalf.
Some examples of stablecoins that are backed by fiat currencies include Tether (USDT), USD Coin (USDC), and Stasis Euro (EUR).
The main component in systems that offer stablecoins backed by other cryptocurrencies or digital assets is the presence of smart contracts, which allows decentralization in both blockchain networks and the DeFi world itself.
A large factor to take into account is that stablecoins are over-collateralized to allow pegging at a higher rate, which would benefit users and the platform itself. A situation would be as such; providing ETH with equal value to 2,000 THB as collateral to receive stablecoins worth 1,000 THB in return. This can be considered vital for the platform as, by doing so, the stablecoins received would be able to withstand a certain level of potential volatility.
An example of stablecoins pegged by other cryptocurrencies is DAI, an Ethereum-based stablecoin.
In the world of investment, any form of goods, service, or commodity is valuable. Therefore, stablecoins have been developed to peg itself to physical commodities as well, like gold. This also ensures that the coins would have low volatility, as well as the original prospect of future growth in value.
A prime example of stablecoins pegged by commodities is Digix Gold (DGX), an Ethereum-based token that pegs 1 DGX to the value of 1 gram of gold, wherein the physical gold would be stored safely in Singapore with inspections on a 3 month basis for transparency and confidence on the investors’ behalf.
Additionally, DGX is also known for its ability to be exchanged for actual gold as well.
Some other prime examples of stablecoins that peg value to commodities include the Tiberius Coin (TCX) which pegs its value to precious metals, Tether Gold (XAUT) pegging to gold, Paxos Gold (PAXG) pegging to gold as well, and SwissRealCoin (SRC), which is backed by the value of the property.
Stablecoins in this category are monitored and managed by algorithmic commands facilitated by smart contracts that help adjust the token supplies to maintain stability. For instance, if prices escalate too much at an unreasonable rate, more supply would be generated to balance the demand.
Some examples of stablecoins backed by algorithms are FRAX (FRAX) and Empty Set Dollar (ESD).
Importance of Stablecoins
Investing in stablecoins is becoming an immensely popular method in tackling the crypto market for new investors, mainly as it involves less risk rates, which can include those involved with traditional banking systems.
Therefore, investing in stablecoins has somewhat become a new means of summing up savings for some investors to fight off any plausible occurrences of inflation or deflation in the future.
Undoubtedly, its steady price change is what makes stablecoins unique. Stablecoins are unlike other altcoins in the aspect that their price change does not relate to Bitcoin’s. Additionally, it can be an excellent entry point for new investors, especially when initially developing a risk management scheme and understanding market mechanics.
In summary, stablecoins have become a driving force within the digital market due to their low fluctuation rates, reliability, and transparency. They have also been a significant attraction for new investors as well, especially with new variations pegging their values to other currencies or assets.
Moreover, by pegging its value to other currencies, stablecoins can be functional in the DeFi world and when exchanging for other related currencies and assets. Nonetheless, investors are highly advised to conduct their research on stablecoins and their volatility to not only develop a better sense of comprehension but to also deviate a risk management strategy.
Reference: Wikipedia, CBinsights, Investopedia, Gemini