Stable cryptocurrencies are units indexed to a value. They emerged as a result of very high price fluctuations of cryptocurrencies and digital asset investors’ need for a constant and accustomed store of value.
A Short History of Stablecoins
Transactions involving cryptocurrencies used to be between cryptocurrencies-cryptocurrencies, and the USD trading pairs were quite scarce. Creating and using bank accounts, which were needed to use USD trading pairs, used to create problems for individuals and companies. Many of the early stablecoins were projected to use cryptocurrency as collateral. In financial markets, the funds always prefer the safest harbors. Therefore, it is also important to preserve the value of the resulting asset. Projects with crypto assets with constantly changing values as collateral have not been successful in the past for this reason. Tether, contrary to this trend, gained the trust of the market by holding USD collateral in its bank accounts and led the way for other projects that work with fiat money collateral in bank accounts.
Types of Stablecoins
Asset-Backed Stablecoins: Coins formed by fixing the collateral reserve to tools such as fiat money, precious metals and securities. Examples include USDT, BUSD, HUSD, USDC, GUSD.
Cryptocurrency-Backed Stablecoins: Coins formed by fixing the collateral reserve to one or more cryptocurrency. In this type of coins, the reserve is different from the tool whose value is fixed. For example, in the DAI project, users can get DAI equivalent to the instant value of Ethereum in USD with Ethereum collateral.
Protocol-Backed Stablecoins: There is no reserve in this type of coins. Varying at specified periods, the number of assets in wallet addresses is equal to the value of the targeted tool. For example, in the scenario where the unit value of X coin is 10 cents, when the unit value of X coin drops to 5 cents, the number of the assets in the wallets doubles, and the total value of the assets in the wallets does not change, but becomes equal to the value of the targeted tool.
