What are Stablecoins, and why are they not falling amid crypto market crash?

What are Stablecoins, and why are they not falling amid crypto market crash?

It has been observed amid the latest crash that top tokens like Bitcoin, Ether, BNB, SOL, etc. are all plummeting. But why is it that some tokens like USDT, USDC, TerraUSD not falling?

Stablecoins aim to give its users the best of both worlds. Stablecoins aim to give its users the best of both worlds.

The cryptocurrency markets have been crashing. Top tokens like Bitcoin, ETH, ADA, SOL, etc. have all fallen below support levels. But amid all this chaos, there are certain tokens, like USDT, USDC, and USDTerra which have not shown any drastic change in their value.

Why is it so that while the whole crypto markets are plunging in red, these few tokens seem to be more stable?

This is because these tokens are Stablecoins.

What is Stablecoin?

Stablecoins are cryptocurrencies that attempt to peg their market value to an external variable, like fiat currency, such as the U.S. dollar, or a commodity price, such as gold.

They offer price stability by collateralisation (backing) or algorithmic buying and selling of the underlying asset or derivatives.

Best of both worlds

Stablecoins aim to give its users the best of both worlds. They provide quick processing, security and privacy of cryptocurrencies like Bitcoin, Ethereum during transactions. Secondly, they maintain steady prices and lack volatility of cryptocurrencies.

Types of Stablecoins

Stablecoins are divided into four groups depending on their respective functioning methods.

Fiat-Collateralised Stablecoins

Stablecoins that are fiat-collateralised keep a fiat currency reserve, such as the US dollar, as collateral for issuing an acceptable number of cryptocurrency coins. 

Some examples of fiat collateralized stablecoins are USD Tether, USDC Coin, etc.

Commodity Collateralised Stablecoins

Some other collateral sources include precious metals such as gold and silver, as well as commodities such as oil.

GSX is a gold backed stablecoin. Tether Gold and Paxos Gold are another commodity backed stablecoins.

Crypto-Collateralised Stablecoins

Stablecoins that are crypto-collateralised are backed by other cryptocurrencies. Because the reserve cryptocurrency may be volatile as well, such stablecoins are over-collateralised, which means that a larger number of cryptocurrency tokens are retained as a reserve for the release of a smaller number of stablecoins.

Non-Collateralised (Algorithmic) Stablecoins

The price of non-collateralised stablecoins is maintained using a method similar to that of a central bank, but without the use of reserves. For instance, the dollar-pegged basecoin uses a consensus mechanism to increase or decrease token supply in response to demand.

Such actions are comparable to a central bank printing banknotes to maintain the value of a fiat currency. This can be accomplished by launching an autonomously operating smart contract on a decentralised network.

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Published on: May 09, 2022, 5:45 PM IST
Posted by: aakanksha chaturvedi, May 09, 2022, 5:38 PM IST