What is a stable coin?
Stable coins are stable price cryptocurrencies. These coins are pegged against reserved assets like the USD, another cryptocurrency or exchange-traded commodities such as gold. Unlike cryptocurrencies such as Bitcoin and Ethereum, which are volatile, stable coins remain stable. Many businesses and companies can, therefore, trade using stable coins as stability guarantees no price volatility.
Currently, there are three types of stable coins in the cryptocurrency market.
1. Stablecoin backed by Fiat This is the most common type of stable coin which is backed by US dollar or other fiat currencies at a 1:1 ratio. Examples: Tether (USDT), USD Coin (USDC), Indonesian Rupiah Token (IDRT). Coin issuers which could be a company, a bank or even a government should hold the same amount of money in their Bank accounts or Trust accounts.
2. Stablecoin backed by Crypto This type of stable coin which is also pegged to US dollar at a 1:1 ratio however the underlying collateral is cryptocurrency instead of fiat. The full process of the coin issuance is done via a set of protocols carried out on blockchain. One main example here is Maker DAO’s stablecoin (DAI). Users can lock up a certain amount of cryptocurrencies, such as Ethereum (ETH), as collateral for borrowing DAI, which is pegged to the US Dollar.
3. Algorithmic Stablecoin This is a relatively new type of stable coin that is not widely used yet. Basically, there is no collateral backing. Algorithmic stable coin use blockchain-based algorithms to ensure the coin will always trade at US$1. Examples : Basis and CarbonUSD.