This article was prepared for the link3 project, as part of a contest of posts.
Stablecoin is commonly consided to be a cryptocurrency whose price is pegged to a particular fiat currency, such as the Dollar or the Euro. Today, the market capitalization of the three most popular stablcoins (USDT, USDC, BUSD) exceeds $120 billion according to Coinlist.
However, there are other types of stablcoins, such as DAI (fourth place in the top of stablcoins with a capitalization of $ 5.6 billion). By buying DAI, you acquire a "portfolio" of cryptocurrencies at once, including: USDC, ETH, and even Treasury bonds.
Info taken from Daistats.com
DAI is over-collateralized by cryptocurrency to avoid the high volatility inherent in crypto-assets. And the smart contracts on which this stackablecoin is built allow liquidity to be sold to support DAI's collateral in case of necessity.
Another type of stabelcoin is algorithmic stabelcoins. These are digital assets whose price is pegged to a reserve asset, but not collateralized by it. The pegging is done by an algorithm, a program that allows the balancing of the asset's negotiable supply. In other words, an algorithmic stablcoin uses an underlying algorithm that issues more coins when the price goes up and buys them from the market when the price goes down. Examples of algorithmic stablcoin include USDD (top seven on the stablcoin list, market capitalization of $723 million) on the Tron blockchain or the infamous UST on the Terra blockchain.
photo source bit.ly/40o31gl
Each type of Stablecoin has a number of advantages and disadvantages, it is impossible to discuss them all in one article, but let's focus on the most important ones.
Classic Stablecoins backed by fiat currency are rightfully ranked in the top three. This is the simplest and seemingly most reliable way to create digital dollars: a company issues 1 cryptodollar, for every real dollar in the company's bank account. In other words, it's a check that gives you the right to exchange a cryptodollar for a real one.
What is the purpose of all this? Cryptodollar has all the charms of cryptocurrency: it uses blockchain technology, ease of use, confidentiality and more. However, there are also risks. The main one is centralization. On the one hand, fiat collateral gives the feeling that you own real money, not “moneyballs”. But at the same time, as recent practice has shown, the bank holding the assets may go bankrupt. In addition, companies that issue Stablecoins are often subjected to pressure from regulators, which distances us from the idea of decentralization in cryptocurrency.
photo source shorturl.at/eBHW0
Important criteria for classic stabelcoins are:
Collateral must be transparent and diversified. Reliably protected from hacker attacks. Possesses high liquidity. 2. Stablecoins backed by cryptocurrency are more decentralized. If we consider DAI token, today it is 57% secured by USDC and only 43% by other cryptocurrency. DAI can be issued by any user. This staplecoin does not formally have any supervisory authority, but is managed by the decentralized MakerDAO organization. The obvious disadvantage of cryptocurrency collateral DAI, at first glance, is the high volatility of the cryptocurrency, because the price of stabelcoin must be strictly tied to the dollar. However, to reduce the risks of sharp price jumps, DAI has excessive collateral: to release 1 DAI, the user must lock his crypto-assets in the equivalent of $1.6.
From this there are other risks: Because you are essentially borrowing the coin, the steiblocoin scheme is somewhat like leveraged trading, and if the Ether falls below the 1:1 ratio, the issuer can ask for more liquidity. In the case of an even deeper drop, a forced liquidation is possible.
Algorithmic Stablecoins: Although the idea is not new, algorithmic stablecoins peaked in popularity in the early twenties. The idea of absolute decentralization appealed so much to the crypto community, because these stackablecoins are not physically backed, and pricing is not supported by a specific issuer, but by a smart contract. The peg to the dollar is regulated by algorithms. Seemingly everything is fine, but the algorithm is not always ready to handle the laws of the market. If a large number of big players want to sell their assets, the algorithm simply does not have enough liquidity to support them. A prime example of such events was the collapse of the UST Stablecoin. In May 2022, 84 million UST were put up for sale, causing the token to lose its peg to the Dollar, causing even more panic among asset owners, and a subsequent exponential drop of more than 95% in the price of stabelcoin.
Conclusions: Whether it's regulatory attacks, high volatility, or algorithm errors, the risks in the young cryptocurrency market remain extremely high. We take these risks in the hope of multiple profit.
I wish everyone decentralization and diversification!!!