Stablecoins collateralized by Cryptocurrencies
Crypto-backed stablecoins are typically backed by cryptocurrencies with large market capitalization values such as Bitcoin or Ethereum. Often, crypto-backed stablecoins are backed by a mix of cryptocurrencies. This type of stablecoin can track the price of single crypto-assets (in which case they might be rather volatile) or baskets of crypto-assets that could be somewhat less volatile, but still more volatile that fiat currencies.
Crypto-backed stablecoins can also be designed to track the price of fiat currencies using balancing mechanisms. Crypto-backed stablecoins that track fiat have to be over-collateralized; the total amount of crypto backing the stablecoins must be worth more than their nominal value because the value of the backing assets could fall. Crypto-backed stablecoins can operate entirely through smart contracts with no central authority controlling them.
Benefits
• Decentralization: issued through a decentralized structure that is immune to centralized interference.
• Transparent: every transaction is recorded on the public blockchain, allowing for full transparency and accountability.
Disadvantages
• Volatile: For crypto-backed coins that do not track fiat, the underlying asset for this type of stablecoins is volatile and the value of the “stable” coin can drop in real terms. For those that do track fiat, there may be cases where the backing assets lose enough value that the outstanding coins exceed the value of the collateral. For fiat-backed stablecoins, the more overcollateralized the safer they are.
• Complex: Collateralisation processes are not always understood by users, so they don’t feel ready to use them. And complex smart contracts may be vulnerable to hacks.
You can learn more about stablecoins in our previous articles:
Stablecoins that are collateralized with Fiat Currency
Stablecoins collateralized by Commodities
Stay tuned for our next article which will cover algorithmic stablecoins.
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