Stablecoins are tokens pegged to real-world asset like gold, fiat currency like the US Dollar or even more unique algorithms. The high level of volatility amongst crypto-assets created a need for digital currencies tethered to every day/real-life medium of value immune to regular shifts in market value like most cryptocurrencies.
The principle behind stable coins and their “stability” was created to ensure that newbies, crypto enthusiasts, and low-risk investors can enjoy predictability of their assets, carry out day-to-day transactions with crypto, get paid for services in crypto coins without fear of devaluation when exchanging for fiats or other physical media of value like the US dollar, Naira, gold or oil.
Having stablecoins creates a safe pocket within crypto markets and can broadly be categorized into 4 divisions based on their respective collaterals or process of value gain.
- Fait-backed: Being the most popular kind, in the family of stablecoins. This category of cryptocurrencies are backed 1:1 by fiat currency. Traditional currencies(fiat) remain centralized and controlled by banks/financial institutions and remain proportionate to the number of Stablecoins in circulation.
Examples of fiat-backed crypto include; BUSD, USDT, NGNT, USDC
- Crypto-backed: crypto-backed stablecoins are backed by another cryptocurrency as collateral. This category of digital assets rely on smart contacts on the blockchain rather than a centralized issuer in the case of fiats. When purchasing this kind of stablecoin, you lock your cryptocurrency into a smart contract to obtain tokens of equal representative value.
Examples of crypto-backed are Wrapped Bitcoin (WBTC), Havven, DAI
- Commodity-backed: with physical assets; real estate , and precious metals/resources such as gold and oil. Stablecoins backed by commodities make it easier to invest in assets that exist outside the reach of certain local communities.
A few examples include; Tether Gold (XAUT) and Paxos Gold (PAXG)
- Algorithmic or Hybrid stablecoins: Algorithm based stablecoins are very unique from all other categories which require one valuable asset or the other as a collateral. These stablecoins rather rely on specialized algorithms and unique smart contracts that enable the supply of a certain token available. They are useful in effectively balancing funds held on the blockchain via smart contracts with supply and demand to maintain price stability. An algorithmic stablecoin system reduces the number of tokens in circulation when the market price falls below the fiat currency's price, and the opposite when market price increases above fiat currency with new token injected into circulation to stabilize the value downward.
Examples of hybrid stablecoins include; AMPL, FEI, FRAX, RAI
Generally, Stablecoins introduce the stability of fiat currencies to the blockchain, meaning that they are more secure and more transparent versions of fiat currencies that can interact with applications built on the blockchain. Asides this, they allow improved mobility of crypto assets throughout the decentralized finance ecosystem.
You can exchange stable coins like USDT to Naira on Busha