A stablecoin is a type of cryptocurrency that has been designed to diminish the effects of price volatility. They are generally used as value stores or units of accounts, they are also considered in situations where more volatile cryptocurrencies are not desirable.
The creators of stablecoins use many different designs to attempt to limit price volatility. The value of stablecoins can be linked to that of FIAT currencies, or it can be backed by other commodities such as gold and other rare metals.
These stablecoins can either be centralized, being backed by commodity or FIAT models or they can be decentralized by using other cryptocurrency platforms as leverage in a few different manners.
Centralized stablecoins, backed by FIAT currencies are currently the most common example of a stablecoin and can be characterized in the following ways:
-Their value is directly connected to a FIAT currency (the most common are, the US Dollar, the Euro, and the Swiss Franc, due to their stability), this is set at a fixed ratio.
-The total amount of FIAT currency that is used to back the stablecoin must be a reflection of the number of stablecoins in circulation.
-”The tether is realized off chain”. This is primarily done through banks or other accredited financial businesses which can deposit the funds used to back the stablecoin.
These points are essentially the same for commodity-backed stablecoins. The only difference is that the points refer to the commodities being used to back the stablecoins, rather than a FIAT currency.
Some examples of centralized stablecoins, backed by FIAT currencies include.