What is a Stablecoin? Types of Stablecoins

When you think about cryptocurrency, the next possible term that will come to your mind is volatility. Then, stablecoin might follow. Crypto’s volatile feature makes the population wary of its potential to become a standard payment method. Bitcoin and other cryptos fulfill the goal of eliminating the third party during a transaction. But crypto’s fluctuation begs the question of sustainability as a financial tool.

But stablecoins brought a new dimension to the crypto space. They cushioned the volatility associated with other cryptos. They give users the advantage of holding onto their money when they intend not to trade during a market phase.

What is a Stablecoin?

A stablecoin is a category of cryptocurrency that has its value tied to the value of a real-world asset class. This asset class can be a traditional fiat currency, a commodity such as gold, precious metals, or financial instruments. The asset class is the reserve and serves as collateral for a stablecoin.

Stablecoin is created as a rescue option for individuals who want to use crypto as payment, but crypto volatility makes it difficult. It is almost impossible for you not to come across stablecoins if you’re using crypto for other activities than investing or trading. For instance, they are integral to decentralized finance (DeFi) products.

However, they carry some risks depending on the kinds of methods they use to uphold their values. Some rely on the asset that backs them, some depend on algorithms, while some have other ways to sustain their values.

What are the Types of Stablecoin?

There is widespread adoption of stablecoins to hedge over crypto volatility. Users believe that it is a way to be protected from the financial loss crypto market volatility can bring to an individual. While this appears to be true, the recent prince plunge with TerraUSD (UST) is an indication that you can’t totally rely on stablecoins.

However, it is vital that you know what kind of stablecoin you want to purchase before making the call. We have four types of stablecoins based on how they preserve their value.

  • Algorithmic Stablecoins
  • Asset-backed Stablecoins
  • Crypto-backed Stablecoins
  • Fiat-backed Stablecoins

Now, we will dig into details about each type of stablecoin.

  1. Algorithmic Stablecoins

Algorithmic stablecoins are challenging to understand. They are the kind of stablecoins that has no asset backing. Instead, they depend on a computer algorithm to preserve the stablecoin’s value while controlling the coin’s supply. As a result, they have little distinction between them and central banks. But central banks have policies to maintain the stability of a legal tender.

Let’s assume the price of an algorithmic stablecoin is tied to $1. The algorithm functions to automatically pump more tokens into the market when the stablecoin increases in price. And it withdraws the supply when the pegged price falls below $1. Your amount of tokens will change, but your share will remain the same. An example of an algorithmic stablecoin is the TerraUSD (UST).

  • Asset-backed Stablecoins

Asset-backed stablecoins are stablecoins that are tied to assets such as gold, silver or other precious metals. Likewise, they are tied to other commodities such as oil, natural gas, and tangibles such as real estate. These stablecoins are not tied to any cryptocurrency or fiat currency. An example of an asset-backed stablecoin is AABB Gold Token (AABBG).

  • Crypto-backed Stablecoin

Crypto-backed stablecoins have their prices pegged to other cryptocurrencies. These stablecoins have high collateral. And that’s a mechanism to cushion the volatility effect of the crypto they are pegged. Their stability is lesser compared to fiat-backed stablecoins. As a result, it is crucial to know the market behavior of the crypto asset your stablecoin is pegged to.

An example of a crypto-backed stablecoin is the DAI token, tied to US dollar value and supported by Ethereum.

  • Fiat-backed Stablecoin

Fiat-backed stablecoins are cryptocurrencies tied to traditional fiat currencies such as the dollar, euro or pounds. They are stablecoins that you can purchase with your local currency (such as the dollar) and still retrieve the original currency when you need it. Tether (USDT) was the first fiat-backed stablecoin. It opens the way to develop cryptocurrencies pegged to fiat currency and have a reserve.

How to Create a Stablecoin – 5 Ways to Do It

  1. Know the kind of stablecoin you want to develop

This is the most crucial step of the entire process. It can be tricky because some stablecoins have collateral while some don’t. Thus, you can’t establish if a stablecoin has superiority over the other. Instead, you should focus on the purpose of creating stablecoin.

If you want to build for the long-term, you can consider algorithmic stablecoins. But if short-term, stablecoins with collateral should be your go-to. However, there are four essential questions you should ask yourself while deciding on the kind of stablecoin you want to build.

  • What type of decentralization does it need?
  • What is the quantity of liquidity you need from your stablecoins?
  • Do you want the whole architecture to be simple or complex?
  • At what interval would you audit your coin to enhance trust and reduce associated risk?

Having answers to those questions will provide you with clarity on what you want to build.

  • Know the platform and technology needed to build the stablecoin

Now that you know the kind of stablecoin you want to build, the next step is to choose the platform for its creation. Initially, Ethereum used to be the only platform where developers build stablecoins. But it is a different story now. We now have other platforms such as Tron, EOS, and others where you can create a stablecoin. Meanwhile, consider the pros and cons of each platform before deciding.

  • Ruminate on liquidity maintenance

Liquidity is another critical consideration in building a sustainable stablecoin. If you didn’t get it right, your whole efforts towards building a stablecoin might become a fire flare. You must work around the coin value, inflation, and transaction fees and protect it from the high supply. This makes it difficult for secondary market sellers to sell at a discount.

  •  System technical and visual designs

You can regard this step as the user-focused phase. It is the process where you design the whole system for users to interact with your stablecoin easily. This means that you will often design the screens for websites and mobile apps. Without this, users might find it hard to use and maximize your stablecoin.

  • Smart Contract Development, Blockchain Integration and Mainnet Launch

The next major step after the designs is system development. This mandates you to write smart contracts that will interact with your stablecoin. After developing your stablecoin features and connecting them to a blockchain, you can launch it through the test net. There are various test nets available on the Ethereum platform. Thus, you can launch there and ask for real-time feedback on the quality of your crypto product.

3 Best Stablecoins to Buy

  1. Tether (USDT)

Tether (USDT) is the oldest stablecoin in the crypto market. It was launched in 2014, and its popularity didn’t go down to date. Based on market capitalization, it is the most valuable stablecoin. It was primarily used to move money across exchanges. But today, it has been integrated as a payment option across international markets.

  • AABB Gold Token (AABBG)

AABB Gold Token is a cryptocurrency token tied to the market value of gold. It is hybrid crypto that has 100% backing of physical gold. AABBG is initially not a stablecoin, but it functions as one and provides more financial advantages than stablecoins. Its price is pegged at 0.1 grams spot price of gold. You can buy AABBG on the AABB Wallet app.

  • Binance USD (BUSD)

Binance USD (BUSD) is a stablecoin tied to the U.S. dollar. Its supply is pegged at a ratio of 1:1, and it undergoes monthly auditing. That explains that a unit of BUSD has $1 held in reserve. You can swap your BUSD for fiat when there is a need. You transact at no cost when using the Binance exchange to convert fiat or crypto to BUSD.

Is Stablecoin a Good Investment?

Despite the doubts surrounding crypto sustainability as a financial tool, stablecoins create a fresh perspective for global users to adopt crypto as payment options. It doesn’t go without mentioning that there are different risks associated with stablecoins. On the other hand, they have served to cushion economic shocks crypto might bring to the traditional finance system.

However, if you want to invest in a crypto token that serves the best function of a stablecoin, AABB Gold Token (AABBG) should be your next call. AABBG is hybrid crypto that has the total backing of physical gold. As a token, it benefits from the market advantage of gold and crypto markets.

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