What is a stable coin?

February 14, 2020

Stable coins are stable price digital assets. These coins are pegged against reserved assets like the USD, another digital assets or exchange-traded commodities such as gold. Unlike digital assets such as Bitcoin and Ethereum, which are volatile, stable coins remain stable. Many businesses and companies can, therefore, trade using stable coins as stability guarantees no price volatility.

Currently, there are three types of stable coins in the digital assets market.

1. Stablecoin backed by Fiat

This is the most common type of stable coin which is backed by US dollar or other fiat currencies at a 1:1 ratio. Examples: Tether (USDT), USD Coin (USDC), Indonesian Rupiah Token (IDRT). Coin issuers which could be a company, a bank or even a government should hold the same amount of money in their Bank accounts or Trust accounts.

2. Stablecoin backed by digital assets

This type of stable coin which is also pegged to US dollar at a 1:1 ratio however the underlying collateral is digital assets instead of fiat. The full process of the coin issuance is done via a set of protocols carried out on blockchain. One main example here is Maker DAO’s stablecoin (DAI). Users can lock up a certain amount of digital assets, such as Ethereum (ETH), as collateral for borrowing DAI, which is pegged to the US Dollar.

3. Algorithmic Stablecoin

This is a relatively new type of stable coin that is not widely used yet. Basically, there is no collateral backing. Algorithmic stable coin use blockchain-based algorithms to ensure the coin will always trade at US$1. Examples : Basis and CarbonUSD.