Popular Formulas For Stablecoin
What is Stablecoin?
Stablecoin is a very common glossology in the crypto world. It's a special characteristic of cryptocurrency that is denoted for pegging the value of the cryptocurrency to some non-digital assets.
The value of the cryptocurrency may be tied to any physical currency like the U.S. dollar, or some precious metal like gold. Sometimes it may be backed by some other physical assets, other recognized cryptocurrencies, or algorithms also. The backing assets give extra stability to the price of cryptocurrency than others, that's why it is called Stablecoin.
Why Stablecoin!
This format of the digital asset was developed as a response to the price volatility of common cryptocurrencies like Bitcoin which hinders their utility as a medium of exchange due to rapid changes in value & PPP. Different stablecoins use different formulas to maintain stability and to keep their values from heavy and random fluctuations.
These crypto backing formulas have an impact on the volatility and risk level of the cryptocurrencies. For example, a cryptocurrency backed by Fiat Money is supposed to be more stable than a cryptocurrency that is backed by other digital assets. Because whenever a cryptocurrency is backed by Fiat Money, it is linked to a centralized financial system that is highly regulated by the central bank or some authority. But the cryptocurrency which is backed by other digital currency like bitcoin-backed stablecoins, they are not linked to any centralized financial system as well as no controlling authority is regulating what the currency is pegged to.
Formulas of Stablecoin
Here we are discussing some common formulas of the securing method for the stablecoins that are commonly practiced in the crypto world now with examples in brief.
1. Stablecoins Backed By Fiat Money
Any Fiat Money which is authorized by any regulatory authority is tagged with this type of stablecoins. It creates a critical point between centralized and decentralized currency systems. For example, a very popular cryptocurrencyTether is pegged to the U.S. dollar.
2. Stablecoins Backed By Other Crypto Money
Some stablecoins are backed by any other well-known cryptocurrency like Bitcoin. In this case, the stablecoin is highly controlled with some other regulations and strategies to stabilize its value as the backing asset may not be a stablecoin and has volatile nature. Despite this, this cryptocurrency is less stable in nature than the stablecoins backed by fiat money. For example, stablecoin DAI uses ether (ETH) as collateral.
3. Stablecoins Backed By Some Precious Metal
Precious metals like gold etc. are also popular to peg the value of stablecoins. This type of stablecoin is centralized and its fluctuation on the behavior of common cryptocurrency. Digix Gold Token (DGX) is a cryptocurrency tagged with gold.
4. Stablecoins Backed By Algorithmic
Some stablecoins are not actually backed by some real assets rather than using any computer algorithm by which the value of the stablecoin is stabilized. from fluctuating too much. The algorithm may control the release of cryptocurrency into the supply and regulate its price. By the market forces, the price is automatically backed up. AMPL is an example of an algorithmic-backed stablecoin.
Besides these formulas, there are some other derivatives of stablecoin like commodity-backed stablecoin. But the above-mentioned are more popular strategies for a stablecoin. Though these strategies are not above all criticism, they are popular and have a lot of potential in nature.
Next, I will try to discuss about the strength and criticisms of stablecoins.
~ Regards,
VEIGO (Community Mod)
Wow this is new to me, a formula for stable coin. It will be very okay if we have such formula.
Haven't heard of formulas for stable coins till this post.
Thank you for brining a new idea to my notice.
You have done well sir, thank you for the great teaching that you have shared.