What exactly are stable coins?

By bossin | Average Crypto Guy | 29 Sep 2020

What are Stable Coins?

A stable coin is a type of cryptocurrency that has a market price at a stable rate, aims for the lowest price volatility, and is often pegged to a national currency.

Tether (USDT) is a good example of a stable coin because it mirrors the US dollar. Most stable coins work differently from the other.

One of the reasons stable coins like USDT exist is because it is not always easy to circulate dollars because of restrictions making stable coins like USDT a good option.

Stable coins attain price stability through algorithmic mechanisms of buying and selling the reference asset or its derivatives.

Types of Stable Coins

1. Fiat collateralized stable coins: This type of stable coins is stored in bank accounts which means they are watched and governed by a central organization.

They are usually highly regulated and still less vulnerable to crypto hacks since no collateral is held on the blockchain. Examples of this type of coin are Tether (USDT) Tether, USD Coin (USDC), and so on.

2. Crypto collateralized stable coins: This type of stable coin that works the same way as a Fiat collateralized stable coin and is backed reserves to another cryptocurrency being opposed to Fiat currency like USD.

In short, the price is tied to other cryptocurrencies for example dai (DAI) a decentralized stable coin running on Ethereum.

3. non-collateralized stable coins: Lastly this type of coins are the most decentralized and are not tied to any cryptocurrency or fiat.

They operate similarly to a central bank meaning if there is a low supply and high demand the price will go up and if there is low demand and high supply the price plummets.

non-collateralized stable coins perform this task by using smart contracts that perform the functions of a central bank and monitor prices of stable coins. A good example of this coin is Haven Protocol (XHV).