Opinion: Why are decentralized stablecoins so important?

Types of Stablecoins

Types of Stablecoins

Algorithmic Stablecoins

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Each fiat-collateralized stablecoin is pegged to the corresponding fiat currency at a ratio of 1:1. For every stablecoin in circulation, an equal amount of fiat currency is required to back it. The amount backing fiat-collateralized stablecoins is usually held in a bank account.

• Commodity Collateralized Stablecoins

Let's say someone has a stablecoin backed by 100 USD. Now, he wants to redeem the stablecoin with an equivalent amount of USD. So the company that manages the stablecoin wires $100 into his bank account through their reserves. So, what happens to this person exchanging the $100-backed stablecoin for fiat dollars? The answer is to take the $100-backed stablecoin out of circulation.

Commodity Collateralized Stablecoins

• Commodity-collateralized stablecoins are not backed by currencies, but by assets such as precious metals. As it turns out, gold is the most common commodity in the commodity-collateralized stablecoin space. Other assets such as real estate, other precious metals, and oil are also used as collateral to create commodity-backed stablecoins.

The advantage of holding a commodity-backed stablecoin is that its holders actually own a share of something that has real value — unlike most cryptocurrencies. Holders of such stablecoins can also benefit if the price of the collateralized asset rises in the future.

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Encrypted Asset Collateralized Stablecoin

Crypto-backed stablecoins are backed by major cryptocurrencies like Bitcoin and Ethereum. These types of stablecoins are more decentralized than those backed by currencies and various commodities. Among them, over-collateralization is a major feature of encrypted asset-collateralized stablecoins. Why do you say that? Because it plays a role in hedging the risk of price fluctuations and helps encrypted assets mortgage stablecoins to absorb price fluctuations.

If you choose these types of stablecoins, you will also benefit from their higher liquidity. These stablecoins can also be converted into the underlying crypto asset cheaply, but at the same time they are also among the most complex stablecoins. So we haven’t seen the kind of traction that fiat-backed cryptocurrencies have so far.

• Algorithmic Stablecoins

Do you know which encrypted asset-backed stablecoin is the most popular? You must have heard of it — it’s MakerDAO’s Dai. It is a stablecoin whose value is backed by multiple crypto assets like ETH. The face value of Dai is pegged to the U.S. dollar, and the collateralized ETH is held in the form of smart contracts.

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Algorithmic Stablecoins

The seignorage model is at the heart of algorithmic stablecoin supply work. The principle is to control the supply of these stablecoins through algorithmic governance. If the demand for algorithmic stablecoins increases, new coins will be created. This leads to a reduction in prices, which will soon return to normal levels. The opposite happens when the price of an algorithmic stablecoin becomes too low. You can see that market supply and demand keeps the prices of these stablecoins stable.

When it comes to decentralized stablecoins in the market, algorithmic stablecoins account for the bulk. Even if fiat currencies like the dollar or euro crash along with the crypto market, algorithmic stablecoins will stay strong and survive the crash. But there is a big problem with algorithmic stablecoins - once it crashes, stablecoin holders will not be able to liquidate. Because this type of stablecoin does not involve any collateral.

So, which types of stablecoins are decentralized? Crypto-collateralized and uncollateralized stablecoins are the real decentralized stablecoins. Let’s take a second look at Dai, as it is currently the most popular decentralized stablecoin in the crypto market.

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A Quick Look at Dai — the Most Popular Decentralized Stablecoin

Smart contracts are automatically executed to control the price of Dai. Maker tokens (MKR) are burned when the price of DAI rises above $1. If the price of DAI drops significantly against one dollar, more DAI tokens will be created to stabilize the price.

There is actually no need to rely on anyone to keep DAI stable -- you must be thinking, why would that be? The reason for this is that all the work is done by MakerDAO's algorithm, which means that the algorithm manages the price of DAI.

The thing about DAI is that DAI is only generated when one takes out a loan from the MakerDAO platform. Once the loan is repaid, the DAI is destroyed. So, you can get DAI with a loan from MakerDAO’s Oasis platform. This is the most direct way to get DAI. Another way is to trade DAI on MakerDAO's Oasis platform. You can also trade DAI on any centralized exchange.

When it comes to decentralized stablecoins, their operations and funds are very transparent, so we can rest assured of the entire operation process. Because all the details of their funds are on the public blockchain, everyone can verify them.

in conclusion

Stablecoins play a very important role in the crypto trading market. Traders and crypto enthusiasts who fear the volatility of cryptocurrencies can still participate in the crypto industry through stablecoins. They can hold stablecoins because they are not as volatile as other cryptocurrencies.