Discover Various Types of Stablecoins

The crypto-currency trend has introduced us to the world of cryptocurrencies such as Bitcoin (BTC), Ethereum (ETH), Tezos (XTZ), Cardano (ADA), and the hot-selling Shiba (SHIB), with trading volume soaring to be among the top ten coins with the highest market cap in October 2022.

However, due to the price volatility of these coins, many people believe that cryptocurrencies are high-risk assets in which they are hesitant to invest, but did you know that there is another type of coin known as Stablecoin in the world of crypto? Stablecoins are coins that are valued against a specific asset or currency, making them a more secure investment. It does not, however, imply that stablecoins are not volatile, as they are also valued against volatile assets or currencies!

Stablecoins are classified into three types:

1. Fiat-backed Stablecoin

Fiat-backed Stablecoin is a cryptocurrency that is based on the value of government or legal money in a 1:1 ratio, such as the US dollar, the British pound, and the euro. USDT or Tether, for example, is the most widely used stablecoin in the crypto world, designed to be a digital coin with a ratio similar to the US dollar. The $1 asset is pledged at a 1:1 USDT:USD ratio.

Another widely used stablecoin is USDC, a stablecoin based on the Ethereum Blockchain with a running value second only to USDT, refers to the token's value against the US dollar in a ratio of 1 USDC:1 USD, as does USDT.

2. Asset-backed Stablecoin

Asset-backed Stablecoin is one that is valued against an asset. Gold, land, stocks, or funds can all be used to back this type of stablecoin. However, it is not as acceptable as it should be due to limitations in each country's laws and regulations, which may result in different assets being quoted in value. For instance, stocks, mutual funds, and so on.

Digix Gold (DGX), a well-known asset-backed stablecoin, has a reference value of 1 gram of gold per 1 DGX. In Singapore, Digix Gold coins can also be exchanged for real gold DGX coins.

3. Algorithmic Stablecoin

The final type, Algorithmic Stablecoin, is not based on monetary value or any asset, but it always uses a smart contract mechanism to equal the value of the currencies contained in the Blockchain to determine the value of the coin. It is far more complicated than fiat-backed and asset-backed stablecoins. Examples of Algorithmic Stablecoins include $MIM (Magic Internet Money), a stablecoin based on the principle of Arbitrage, or market mechanisms that fix the coin's price at 1 USD, and the Abracadabra (Lending Protocol), which allows depositors to secure interest-bearing assets to secure their $MIM coins.