Stablecoins — What It Is And How It Works Stablecoins- what it is and how
By: Nigeria Bitcoin Community
Tags: Crypto, Cryptocurrency Investment, Guides And Tutorials, Stable Coin, Altcoins

Types of Stablecoins

Stablecoins are generally divided into 4 main types or categories.

Fiat-Backed Stablecoins. Commodity-Backed Stablecoins. Crypto-Backed Stablecoins. Seignorage-Style Stablecoins.

1. Fiat-Backed Stablecoins

The most common type of Stablecoins is collateralized or backed by fiat. ‘Fiat’ is the paper money in your wallet and the digital money in your bank account.

Examples of fiat money include NGN, USD, EUR, GBP, CHF, and JPY.

Fiat-backed stablecoins is backed at a 1:1 ratio, meaning that $1 of a stablecoin is equivalent to $1 of fiat money.

So for each stablecoin that exists in this category, there is real fiat currency being held in a bank account to back it up.

Here are examples of fiat-backed stablecoins;

Tether (USDT)

A well-known or most popular fiat-backed stablecoin is the currency Tether (USDT). Tether is backed by the US dollar, Euro (EU), and the Japanese yen (JP). Its market capitalization is about $4B at the time of writing.

Tether is issued by a company called Tether Limited. It was launched as RealCoin in July 2014 and was rebranded as Tether on 20 November 2014. Tether is also the 3rd biggest coin in terms of the daily trading volume.

Tether is designed to offer stability (like fiat currencies), transparency and lower transaction charges to users.

Read our complete review of Tether here

True USD (TUSD)

TrueUSD (TUSD), is a popular stablecoin that was introduced in early 2018. It was designed to be simple, transparent and reliable. For this reason, it does not use a hidden bank account.

It is also backed to the US dollar at a 1:1 ratio, which is 1 Tusd represents 1 $. TrueUsd was created as an alternative to Tether because there was a controversy on the transparency of Tether totally back by fiat.

TrueUsd is the first major project built on the TrustToken platform (TrustToken is a platform to create asset-backed tokens).

Tusd was first traded on Bittrex but has expanded into other exchanges which include Binance, CoinTiger, Upbit, and more.

2. Commodity-Backed Stablecoins

A commodity-backed stablecoin is a digital currency whose value is determined by a real tangible asset. These assets may include gold and other precious metals.

This type of stablecoins is backed by commodities (A valued exchangeable goods or materials).

These commodities may increase in value over time. And this increase gives more rewards to people who hold and use them.

Commodity holders can redeem and take possession of their asset but it will take days to do so.

An example of commodity-backed stablecoins is;

Digix Gold Tokens (DGX)

DGX is an Erc-20 token backed by physical gold. Each DGX token represents 1 gram of 99.99% LBMA standard gold.

This gold is stored in a vault in Singapore, known as The Safe House. And every 3 months the gold is being adjusted to ensure transparency (accuracy).

Dgx is created by a company called DigixGlobal. The Digix team was formed way back in 2014.

The value of each Dgx token is fully determined by the market value of gold.

To redeem the physical bars of gold, Dgx holders will have to travel to the vault in Singapore to do so.

3. Crypto-Backed Stablecoins

This Stablecoins is backed by other cryptocurrencies such as bitcoin and ether. In this case, the use of central depositories such as banks is avoided.

This allows for decentralization (having no central authority) since everything is done on the blockchain.

Here is an example of crypto-backed stablecoins;

Dai (DAI)

Dai is a crypto-collateralized asset. It is an ERC-20 token that is created by MakerDao. Dai is pegged to the US dollar to a 1:1 proportion meaning that 1 Dai coin equals 1 USD.

Dai is a cryptocurrency that runs on the Ethereum blockchain and based on this fact DAI is a decentralized cryptocurrency.

4. Seignorage-Style Stablecoins

Seignorage is the only category of stablecoins which is not backed by any asset.

Seignorage coins operate with an algorithmic (accurate step by step) governed approach, just like a central bank that prints more bills.

As the total demand for this coin increases, new supplies are made. This is to reduce the price back to stable levels.

A fine example of a seignorage-style coin is Basis.

Basis

This coin was formerly known as ‘Basecoin’. Basiscoin is a cryptocurrency that its value is backed by the US dollar. This is done through algorithmic adjustments of the coin’s supply.

Price stability is achieved through the monitoring of various exchange rates. If basiscoin is trading above $1, new stablecoins are created and distributed.

If basiscoin is trading for less than $1, base bonds are created and sold.