Crypto is currently a growing industry with a constantly-increasing user base. A study from the Cambridge Center for Alternative Finance found that the number of global crypto users had rapidly increased to 101 million in 2020. However, the value of crypto is very volatile, so not everyone immediately dares to enter this field. For this reason, crypto has seen the development of an increasing number of more stable digital asset types,—for example, stablecoins.
Stablecoins are one type of crypto with a price that tends to be more stable and has the support of various reserve assets. This type of asset gives its users the possibility to transfer value inexpensively and quickly around the world while maintaining price stability. This type of crypto also has advantages in the form of private crypto payment options and stable values that are free of volatility.
In its development, stablecoins reached a value of more than 10 billion US dollars, around Rp. 143 trillion rupiahs in May 2020. In some countries such as Brazil, stablecoins are widely used as an alternative currency in times of crisis. In Hong Kong, stablecoins are also used to avoid internet censorship when the country’s political situation is tumultuous.
Types of Stablecoins
The value of stablecoins is pegged based on conventional investment instruments such as fiat currencies, or other commodities with more stable values. From these instruments, there are several different types of stablecoins.
- Stablecoins backed by fiat currency
This type of stablecoin is the most common. Their value is pegged to one or more fiat currencies in a fixed ratio. Some examples of stablecoin assets pegged on fiat currency are Tether (USDT), USD Coin (USDC), and IDK. In order to issue stablecoins, companies, banks or governments are required to have the same amount of money in their bank or trust accounts.
- Stablecoins backed by cryptocurrency
The ratio of this stablecoin is the same as the previous type, a fixed ratio (1:1). However, the price is designed to be pegged to a cryptocurrency and all the issuance process is based on the existing protocol in the blockchain system. An example of this type of stablecoin is Maker DAO (DAI). In these assets, users can lock in a number of digital assets, such as Ethereum (ETH), as collateral for DAI loans whose prices are pegged to the value of US Dollars.
- Stablecoins based on an algorithm
The Stablecoin Algorithm is still new and not yet commonly used by the public. This type of stablecoin has no collateral. It uses an algorithm based on a blockchain system to ensure the coin will always be traded at a price of one US dollar. The examples for this type are Base and Carbon USD.
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