Cryptocurrency is becoming increasingly popular day by day all over the world, and some prominent crypto influencers expect that soon they may become the primary mode of payment like the traditional one. Despite the fact that cryptocurrencies and Stable Coins are volatile in nature most people are convinced enough with the fact Digital Currencies Adaptations
Blockchain possesses many applications, for the smooth run there’s a need for the universal token that has a price stability. In order to achieve the same you need to have a coin which is not very volatile in nature and whose value tries to remain almost the same even in an economic crisis.There comes in the picture Stablecoin, which is less volatile in nature. Stable coin is a segment of digital currency whose value is tied to an asset of another asset, and it is not controlled by centralized authority hence making it more adaptive.
Now that we have made it clear what a stable coin lets deep dive to and learn what are the types of Stable Coins.
- IOU (I owe you).
- Crypto Collateralized.
- Seigniorage Shares.
IOU is a kind of stablecoin, which is redeemable against a real world currency such as USD or gold. That means on depositing $1USD, one stable coin will be issued. When the depositor wants to remit the stablecoin, the coin may exchange for US dollars. Later the coin may destroy by the blockchain system.
In this kind of system, all the collateral assets may carry in physical asset reserves. It makes sure that even in case of extreme economic breakdown or volatility, the coin value remains intact.
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Crypto collateralized stable coins:
These kinds of Stable Coins may decentralize and are backed by other cryptocurrencies. In this kind of system, the stable coins may over collateralize. It means the value of the backed asset to the value of the stable coin will not be the same.
For instance, you have to deposit $500 US worth of bitcoins to get $100 US worth of stable coins which is a ratio of 5:1. The over-collateralization may prevents the price risk due to the volatile nature of cryptocurrencies.
These kinds of stable coins may noncollateralize, and they may highly decentralize in nature. The objective of this kind of stable coin is to control the supply of stable coins and maintain price stability.
When the price of Stablecoin goes up, smart contracts can create new stable coins for auction, this further increases the supply and reduces the supply. Consider another case, if the price of the stable coin is on the downward trend, it issues Seigniorage Shares to equal the price difference.
As a result of the crash of coin and different cryptocurrencies, the crypto market has become too unpredictable. The stable coins are the latest development, which aims to provide less volatile and appropriate price stability.