Welcome to The Blockchain Report, your daily rundown for the latest in crypto with your host, Taylor Nikolai. Today we’re going to discuss the different types of Stablecoins.
What are the different types of stablecoins? There are three main types: Fiat-collateralized, crypto-collateralized and non-collateralized.
Fiat-collateralization is the simplest method of creating a stablecoin. It’s used by one of the top stablecoins today (Tether). Essentially, fiat-collateralized stablecoins are backed by a real-world asset. This real-world asset is controlled and owned by a central entity. Fiat-collateralized stablecoins are the easiest to understand — they are essentially IOUs on some asset.
Although this method is simple, there is the issue that it requires some degree of centralization. It requires a central entity which can guarantee the issuance and redeemability of the stablecoin into the asset the stablecoin is backed by. Audits from trustworthy parties are required to make sure that the stablecoin is actually fully-collateralized.
Okay, now let’s go over Crypto-collateralized. These are similar, except that crypto-collateralized stablecoins are backed by another cryptocurrency as opposed to being backed by a real-world asset. In order to account for the price-volatility of the collateral backing the stablecoin, stablecoins using this method are over-collateralized.
There are some criticisms of using this method to create a stablecoin. Preston Byrne, for example, believes that these types of stablecoins are doomed to fail in the instance of a “black swan” event where the asset collateralizing the stablecoin declines in value significantly. This would cause the stablecoin to collapse also.
Non-collateralized stablecoins are not backed by any real-world or cryptocurrency asset, and instead maintain value by people expecting it will maintain a certain value. The main non-collateralized approach is the seigniorage shares method. The seigniorage shares method uses smart contracts that automatically expand and contract the supply of the non-collateralized stablecoin using algorithms to maintain its value.
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This method is similar to what central banks do with fiat currencies, but non-collateralized stablecoins do this in a decentralized fashion.
For more information on stablecoins, check out the video above.
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