...by Daniel Szego
"On a long enough timeline we will all become Satoshi Nakamoto.."
Daniel Szego

Tuesday, March 14, 2023

DEFI: Stablecoin basics


A stablecoin is a type of cryptocurrency that is designed to have a relatively stable value, typically pegged to a specific asset or a basket of assets such as a fiat currency like the US dollar or a commodity like gold. Unlike other cryptocurrencies such as Bitcoin or Ethereum, which can experience high levels of volatility, stablecoins aim to provide a more predictable value and can be used for transactions or as a store of value without the risks associated with other cryptocurrencies. Stablecoins can be issued on various blockchain platforms, and some examples include Tether (USDT), USD Coin (USDC), Dai (DAI), and TrueUSD (TUSD).

Major types of stablecoins are: 

Fiat-collateralized stablecoins: These are stablecoins that are backed by a reserve of fiat currency, such as the US dollar. The issuer of the stablecoin holds an equivalent amount of the fiat currency in reserve to ensure that the stablecoin maintains a stable value. Examples of fiat-collateralized stablecoins include Tether (USDT), USD Coin (USDC), and Paxos Standard (PAX).

Cryptocurrency-collateralized stablecoins: These stablecoins are backed by a reserve of other cryptocurrencies, such as Bitcoin or Ethereum. The value of the stablecoin is maintained by holding a certain amount of the backing cryptocurrency in reserve. Examples of cryptocurrency-collateralized stablecoins include Dai (DAI) and BitUSD.

Algorithmic stablecoins: These are stablecoins that use a complex set of algorithms to maintain a stable value. They do not rely on any collateral to maintain their value and instead adjust their supply based on demand to maintain price stability. Examples of algorithmic stablecoins include Ampleforth (AMPL) and Basis Cash (BAC). However, it's worth noting that algorithmic stablecoins can be more volatile than other types of stablecoins, especially during periods of high demand or low liquidity.