Bitcoin changed how we viewed payments and trading when it first launched in 2009. After that, hundreds of other Digital Currencies evolved in the market, which can be used to buy goods and services,make international transactions, etc. But, bitcoins are still uncommon to see used for purchasing dresses or paying at restaurants. Another cryptocurrency is a stablecoin that is backed by a currency, such as a dollar or gold, to be price-stable.

On the other hand, stablecoin has become popular for its low cost, secure payment, and, price stability. They represent real money, like dollars or pounds, making them popular among the masses.

Stablecoins: An Overview

This guide will discuss what stablecoins are and why they are needed will be discussed in this guide to stablecoins. In addition to exploring their advantages and disadvantages, we will discuss whether they are better than traditional cryptocurrencies.

How does it work?

Stablecoins are digital currency. Its value is backed by assets like fiat currency or gold to give it stability. Transactions by stablecoins are high speed and security. There are numerous benefits of stablecoins, including:
A high level of security
Peer-to-peer transaction facility
Transactions that occur in real-time

On the list of stablecoins, there are more than 200, with 30% being active, 60% still in R&D, and 10% discontinued. The total supply of stablecoins reached 12 billion in 2020 as stablecoins enjoyed tremendous growth.

Types of Stablecoins

Stablecoin is identified by its collateral backing structure. They are categorized into four types of collateral structures. The structures are the basis of stable coins.

Stablecoins are classified into the following types based on the underlying collateral structure:

1. Fiat-backed stablecoins

Most stablecoins you will encounter are fiat-collateralized. They are backed by currencies such as Euro, GBP, and USD. Stablecoins backed by fiat is the simplest type, with a 1:1 ratio. Assuming a 1:1 ratio, one stable coin would be equivalent to one currency unit, such as one dollar or one Euro.

As a result, every fiat-backed stable coin is backed up with real fiat currency. Stablecoin holders can redeem their coins in exchange for the same value as fiat currency. The entity that is managing the stable coin will transfer fiat currency to the bank account. A similar number of stablecoins is withdrawn from circulation or destroyed simultaneously.

2. Stablecoins with a commodity backing

Answering the question 'how do stablecoins differ?' sheds light on commodity-backed stablecoins. They are backed by different types of assets, such as metals, as their name implies. Commodity-backed stablecoins are generally backed by gold as collateral. 

As well as gold-backed stablecoins, you can also find many other stablecoins backed by assets such as oil, real estate, and precious metals. Assets such as commodity-collateralized stablecoins are owned by their owners in the form of tangible assets. Cryptocurrencies lack this advantage. In general, commodities can appreciate over time.

3. Stablecoins backed by crypto.

Stablecoins can also be backed by cryptocurrencies. Are cryptocurrencies volatile? Cryptocurrencies back Stablecoins. Can you expect stability? In contrast to fiat-collateralized stablecoins, crypto-collateralized stablecoins offer more decentralization.

4. Stablecoins based on algorithms

The final addition to stable coin categories would be algorithmic or non-collateralized stablecoins. Stablecoins that are non-collateralized or algorithmic have no assets or collateral backing them. Then, what hat makes this category of stablecoins stable?

Unlike collateralized stablecoins, algorithmic stablecoins follow an algorithm to control the supply. Seigniorage shares are another example of this. In the future, new stablecoins will be brought to the market to reduce the price to a normal level with the rise in demand. The circulating supply is reduced in the event of significantly low coin trading.

Final Verdict

There are several ways stablecoins can operate, as illustrated by the different types of stablecoins. Currently, stablecoins are available in four different models that are four different collateral structures based. 

1. Crypto-backed stablecoins
2. Fiat-backed stablecoins
3. Commodity-backed stablecoin,
4. Non-collateralized stablecoins 

Stablecoin variants have their unique characteristic: the collateral backing the stable coin.

You can also observe other subtle differences. A crypto-backed stable coin offers better liquidity, whereas a fiat-backed stable coin is easier to use. Take an in-depth look at stablecoins and their various variations to understand them better. Although if you are also interested in Bitcoin trading, you can choose Bitcoin Era, which is one of the top leading platforms for Bitcoin trading.