Explained: What are stablecoins? – Deccan Herald

Whilst bitcoin is the most popular cryptocurrency in the world, it is highly volatile in its valuation. In November 2019, one bitcoin was valued at around $6,000, it rose to a staggering nearly $20,000 in December of that year only to drop to a little under $7,000 in February 2020. Due to this volatility and instability, bitcoins, ether and other cryptocurrencies are not viable for everyday use by regular folk.

Stablecoin is a new segment of cryptocurrency that aims to be the antithesis cryptocurrencies such as bitcoins. Stablecoin attempts to achieve price stability by being pegged to a reserve asset such as the US dollar, gold or any other foreign currency. Stablecoins thus offer the stability of the regular currency and the privacy and security of cryptocurrency transactions. This allows central banks to more confidently allow the use of cryptocurrency and regulate them.

There are three types of stablecoin: fiat-collateralised, crypto-collateralised, and algorithmic stablecoins.

Fiat-collateralised stablecoins

These stablecoins use a reserve fiat currency such as the US dollar, gold, silver, oil, among other reserve assets as collateral to give the customer a suitable amount of crypto coins. These reserves are usually maintained by independent custodians and undergo compliance auditing. Cryptocurrencies such as Tether, TrueUSD among others are equal in value to one US dollar and are backed by dollar deposits.

Crypto-collateralised stablecoins

Crypto-collateralised stablecoins are pegged to other cryptocurrencies such as bitcoin or ether. Since the reserve cryptocurrency may also be prone to high volatility, which stablecoins try to avoid, these stablecoins are over-collateralised which means