What Are the Types of Stablecoin?

Zurich, Switzerland -- (ReleaseWire) -- 04/28/2020 -- Why was stablecoin born?

As its name implies, a stablecoin is a currency of stable value. The role of the stablecoin is very similar to that of fiat currency, both of which can be used to buy goods and services. And despite inflation, exchange-rate fluctuations and other factors, the value of most of these currencies is subject to very little change on a day-to-day basis.

Stablecoins — in the form of digital money — aim to mimic traditional, stable currencies. Then you may ask: what's the meaning of stablecoin?

Unlike other digital currencies, stablecoin is immune to extreme price fluctuations -- allowing investors to protect their assets by exchanging them to stablecoin in crypto market with extreme price fluctuations. This is the main motivation for the creation of stablecoin. One of the most famous examples of crypto price volatility was a programmer who paid 10,000 bitcoin (then worth $30) for a pizza in 2010. The 10,000 bitcoin would be worth $75 million today (at April 26's price).

On the other hand, stablecoin enjoys the benefits of cryptocurrency technology -- such as transparency, security, fast transactions, low fees and privacy -- while enjoying the same level of trust and stability as fiat currencies.

Types of stablecoin

1. Fiat-collateralized stablecoin
Many stablecoin's are backed, or collateralized, by fiat currency like USD, EUR, GBP, etc.

Stablecoins backed by fiat are commonly anchored at a 1:1 ratio, meaning that a stablecoin corresponds to a unit of the anchored currency (such as the US dollar). So every time the issuer mints a stablecoin, it needs to deposit a unit of currency in its bank account.

Using fiat currency as value support is the choice of many stablecoin issuers, because this anchoring method is simple and easy for people to understand and accept, which is easy for them to spread to all parts of the world.

As long as the anchored fiat currency is stable, the stablecoin is stable. That looks pretty solid, since every fiat currency is backed by national credit. But a black swan event cannot be completely ruled out. For example, COVID-19 virus is now spreading widely, which has hit the economy of many countries and led to frequent devaluations and volatility of fiat currencies. These events also remind us that stablecoin, backed by fiat money, is not foolproof.

2. Commodity-collateralized stablecoin
Commodities for collateral can be precious metals, real estate, oil and so on. The most common collateral is gold, which has long been popular as an ancient currency. The holder of this type of stablecoin is actually holding a tangible asset of real value -- something most cryptocurrencies don't have. Over time, these commodities even have the potential to appreciate in value, which increases the incentive to hold and use these stablecoins.

3. Crypto-collateralized stablecoin
In theory, stablecoin backed by crypto assets is more decentralized than stablecoin backed by a single fiat currency, because all data about cryptocurrency is clear and transparent on the blockchain.

To reduce the risk of price volatility in the crypto market, the mortgage rate of stablecoin is typically more than 100%. If a crypto-collateralized stablecoin has a collateral rate of 200%, in which case the issuer must reserve $200 worth of cryptocurrency to mint $100 worth of stablecoin. Even if the cryptocurrency price falls by 20%, its $100 worth stablecoin is still backed by $160 worth cryptocurrencies.

Qcash(QC) is a stablecoin anchored to offshore CNY by 1:1 and backed by over 150% crypto asset reserves. That means for every 100 Qcash(100 CNY) that are minted, 150 CNY worth of crypto assets are used as collateral, and the pledge address is public on its website (www.quickcash.com). Now Qcash's market share in stablecoin is growing, with daily trading volume steadily increasing:

Crypto-collateralized stablecoins are decentralized, allowing processes to be even more trustless, secure, and completely transparent. They also enjoy much more liquidity, meaning they can be quickly and cheaply converted into their collateralized crypto asset. But because its mechanism is the most complex, so in the early development it needs to invest more publicity power.

4. Non-collateralized stablecoin
Non-collateralized stablecoin does not have any value support, which at first glance may sound contradictory to the value attribute of fiat currency. US dollar, the world's common currency, was once backed by gold, but it's not being backed by gold decades ago. Today, US dollar remains remarkably stable because people believe in its value.

Where does the non-collateralized stablecoin value come from? This type of stablecoin controls a stable supply by using an algorithm.As demand increases, the algorithm automatically mints new stablecoin to bring the price down to normal levels.If stablecoin trades too low, stablecoin on the market is bought to reduce the supply in circulation. In theory, the price of stablecoin will remain stable because they are driven by market supply and demand.

Because it is not backed by any assets, this means that this form of stablecoin can survive and remain stable even if the whole crypto market collapses. But because this non-collateralized stablecoin needs sustained growth to succeed, the holder's funds is at risk in the event of crash, when there is no collateral to liquidate.

With the development of crypto technology, stablecoin will gradually be more decentralized. Investors are also more likely to hold multiple stablecoins at the same time to reduce the risk of funds. When investors choose stablecoin, they need to be mindful of the value behind it.

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