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Stablecoins are cryptocurrencies that are pegged to the value of other cryptocurrencies, fiat currencies, or commodities like precious metals. Stablecoins are less risky cryptocurrencies to invest in because their pegged assets fluctuate outside the cryptocurrency markets. Most stablecoins have a mechanism in place to redeem the underlying assets. This makes them unlikely to drop below the value of the underlying asset. There are three types of stablecoins: commodity-backed, fiat-backed, and cryptocurrency-backed stablecoins.
Commodity-backed stablecoins
The value of commodity-backed stablecoins is pegged to one or more (redeemable) commodities. Holders of these stablecoins can redeem them at a set conversion rate for real assets.
Fiat-backed stablecoins
The value of fiat-backed stablecoins is pegged to one or more currencies (like the US dollar, Euro, and the Swiss Franc). Users can trade stablecoins on cryptocurrency exchanges for fiat currencies. Financial institutions serve as depositaries of the currency used to back the stablecoin.
Cryptocurrency-backed stablecoins
The value of cryptocurrency-backed stablecoins is pegged to another cryptocurrency or a cryptocurrency portfolio. These stablecoins use smart contracts to lock up the collateral. Smart contracts regulate the supply of these stablecoins on-chain.
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Stefan Grasic (Dipl.-Jur) is the owner of Business24-7 and has considerable experience in the financial and investment niche, but also enjoys writing articles for the general readership. Stefan is an active stock, CFD, crypto and general investment researcher, advising blockchain companies such as Blockbird, GoCrypto, Hive Terminal at their start up level. Stefan began trading in 2010 as a college student. Money was tight,…