Exploring Stablecoins

Not all stablecoins are the same as they employ different mechanisms to keep their peg against USD. There are three types of stablecoins—fiat-collateralized, crypto-collateralized, and algorithmic stablecoins. Most stablecoins use the fiat-collateralized system to maintain their USD peg.

The prices of cryptocurrencies are extremely volatile. In order to mitigate this volatility, stablecoins pegged to other stableassets such as the USD were created. Stablecoins help users hedge against this price volatility and allow for a reliable medium of exchange. Stablecoins have since quickly evolved to be a vital component of DeFi that is piv

Fiat-collateralized stable tokens are relatively easy to set up, but they have a centralization problem. This is also why some refer to them as “centralized” stable tokens. An institution – usually operated by a private company – needs to manage the physical assets that act as collateral of the stable token, usually in a bank account or secure vaul

Decentralized stablecoins aim to solve this trust issue. They are created via an over-collateralization method, operate fully on decentralized ledgers, and are governed by decentralized autonomous organizations. Anyone can publicly audit their reserves.

Traditionally, the crypto community distinguished between the following types of stable tokens: (i) fiat-collateralized or commodity-collateralized stable tokens, (ii) crypto-collateralized stable tokens, and (iii) algorithmic stable tokens. Lately (iv) central banks have also started looking into tokenizing their currencies which already come with