A stablecoin is a fixed-value cryptocurrency that acts as a store of value like the fiat currency and provides liquidity to the crypto markets.
There are several types of stablecoins such as Algorithmic Stablecoins(DAI), Asset-backed Stablecoins (USDT), Hybrid Stablecoins(USDD), Fiat-pegged stablecoins(USDC), LP stablecoins, Reward-based Stablecoins (BFUSD), RWA stablecoins(uMINT) and asset-pegged stablecoins (XAUT).
Purpose
There are multiple roles that a stablecoin plays in the world of crypto.
- First, it serves to protect the value of your assets. This helps to shield them from market volatility.
- Secondly, stablecoins are necessary to be able to use DeFi. Most DEXs and DeFi protocols support stablecoins as a way to use them.
- Thirdly, stablecoins help you pay others via crypto without affecting the value of your transactions. Being stable, the receiver can keep them as they are and use it at a later stage without worrying about volatility
Types of Stablecoins
Algorithmic Stablecoins
Algorithmic Stablecoins are those that are backed by complex burn and transfer mechanisms that balance their demand and supply, thereby maintaining the same price.
An example of such a stablecoin is USDD and DAI.
However, fully algorithmic coins also exist like UST(TerraUSD).
Asset-Backed Stablecoins
These are the stablecoins that derive their value from the assets that are kept as a reserve. Usually, these stablecoins have an equal value of assets as their market cap. The backing of an asset helps them maintain their value.
USDC, USDT, and FDUSD are three examples of fiat asset-backed stablecoins.
Another type of stablecoins are the crypto-backed stablecoins that have other cryptocurrencies in their asset reserves such as DAI.
There also exist stablecoins backed by other assets like Gold such as XAUT issued by Tether.
Fiat-Pegged Stablecoins
These stablecoins have their values fixed to a fiat currency like the US Dollar. This fixing is also known as pegging.
Fiat-backed stablecoins can be either asset-backed or algorithmic.
- Asset-backed fiat stablecoins are USDT which is backed by US Treasuries.
- Algorithmic fiat stablecoins are USDD and DAI.
Hybrid Stablecoins
Hybrid Stablecoins are those that depend on algorithms for their value but also have some assets, whether they are fully backed or partially.
USDD is an example of such asset-backed algorithmic stablecoins.
Liquidity Provider(LP) Stablecoins
Liquidity Provider stablecoins are those that you get when you deposit any real stablecoin to a liquidity pool. These LP stablecoins are proof of your liquidity and are required to redeem your originally deposited stablecoins.
An example of LP stablecoins is BFUSD which is given to you when you buy them from Binance, which then lends your originally deposits stablecoins to exchanges for interest, and shares the profits with you.
Reward Stablecoins
These are the stablecoins that are a part of some reward campaigns. They have no value outside their own ecosystem and rarely go cross-chain.