Stablecoins have often been hailed as the Holy Grail in the world of volatile unstable cryptocurrencies. This is because when the price of cryptocurrencies tends to induce high blood pressure in traders, it is wise to have insurance. Among investors and traders of traditional fiat currencies, it is common to hold assets or money in the form of gold bars – as the price of gold is immune to economic instabilities unlike fiat currencies.
A stablecoin is a cryptocurrency which like gold is a stable, autonomous, global currency that is not influenced by a central bank (the most desirable quality of cryptocurrency). Characteristically, most cryptocurrencies have short-term stability, when the economy – and your heart’s under attack, long-term stability is desirous for holding.
So what makes a stablecoin stable? Stablecoins are tied to a currency, precious metals, industrial metals or even another cryptocurrency. For this reason, stablecoins backed by currencies or commodities directly for stability are tagged as “centralized”, whereas those leveraging other cryptocurrencies are referred to as “decentralized.”
Basically, centralized coins are stabilized by assets that fluctuate outside of the cryptocurrency space. Hence, they are subject to the same volatility and risk associated with the backing asset. This article will revolve around centralized stablecoins (currency-backed and commodity-backed).
Currency-backed stablecoins are the most common and their values depend on the backing currency (usually the dollar, euro, Swiss franc, and Yuan) in a fixed ratio. The most common example is Tether which is backed by the dollar (conversion rate is 1 tether USDT equals $1.01 USD). Others are Basecoin, TrueUSD, and bitCNY (pegged to the Chinese Yuan).
Commodity-backed stablecoins are pegged against commodities such as precious metals (gold, silver, platinum, etc.) in a fixed ratio. Examples include Airgead, Anthem Gold, AurumCoin, and Currensee.
In conclusion, a firm understanding of the performance of a stablecoin before investing in it is very important because although stablecoins seem to be immune to the volatility that plagues other cryptocurrencies, it is not immune to failure as learned in the case of Nubits.