Gone are the days when the first and probably the only thing that comes to people's minds when they hear the word cryptocurrency is Bitcoin. Gone are the days too when most of everyone scratches their heads, wondering what in the world cryptocurrency is.
With the crypto market boom, more and more people are getting into it. Now, there are things like altcoins, meme coins, and even stablecoins as well.
We already have talked about what meme coins are here on Tech Times, so let us look at another kind of cryptocurrency, stablecoins.
What is Cryptocurrency?
Before we dive deeper into what stablecoins are, let us first define what cryptocurrency is.
Cryptocurrency is pretty much a digital currency that uses cryptography to secure transactions and prevent counterfeiting. Popular examples of crypto include Bitcoin, Ethereum, and Binance.
It is important to take note that cryptocurrency is fungible, which means a Bitcoin, for example, can be traded for another Bitcoin. In contrast, non-fungible tokens (NFTs), which are commonly associated with cryptocurrency, cannot be traded for anything with equal value.
There are different types of crypto that are available in the market, including stablecoins.
Related Article: NFT vs. Cryptocurrency: Are They the Same Thing?
What are Stablecoins?
A stablecoin has been defined by Investopedia as "a class of cryptocurrencies that attempt to offer price stability and are backed by a reserve asset." Cryptocurrencies are generally known for their unstable volatility, and stablecoins are seen as an alternative to the usual crypto options available.
Investopedia adds that stablecoins "attempt to offer the best of both worlds-the instant processing and security or privacy of payments of cryptocurrencies, and the volatility-free stable valuations of fiat currencies."
Popular examples of stablecoins include Tether, USD Coin, Binance USD, and Dai.
Types of Stablecoins
There are different types of stablecoins available based on the asset that backs them and gives them some semblance of stability. According to Benzinga, these are the types of stablecoins currently available: commodity-backed stable coins, cryptocurrency-backed stablecoins, fiat-backed stablecoins, and seigniorage-style stablecoins.
Commodity-Backed Stablecoins
Commodity-backed stablecoins are those that are "stabilized with hard assets such as gold or real estate," per Benzinga. Gold is often used for commodity-backed stablecoins, but other metals have been used as well.
Examples of commodity-backed stablecoins include Tether Gold and Paxos Gold.
Cryptocurrency-Backed Stablecoins
Cryptocurrency can also be used to back fellow cryptocurrencies. This type of stablecoin usually circulates a lower supply.
An example of a cryptocurrency-backed stablecoin is Wrapped Bitcoin.
Fiat-Backed Stablecoins
Fiat-backed stablecoins are cryptocurrencies that are backed by fiat curries such as the US Dollar. According to Benzinga, precious metals such as silver and platinum can also be considered as fiat.
Examples of fiat-backed stablecoins are the USD Coin and Tether. Both have their prices tied to the US Dollar.
Seigniorage-Style Stablecoins
Seigniorage-style stablecoins, otherwise known as algorithmic stablecoins or non-collateralized stablecoins, are those that are backed by an algorithm, a process, or even a working mechanism to keep their prices stable.
Read Also: US Treasury Wants Stablecoins to be Issued by Banks
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Written by Isabella James
