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What are stablecoins? Why are they relevant to you?

Dezy Learn is here to break down both decentralised and traditional finance basics so that you are able to make informed decisions on your money.

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So, what are stablecoins?

Stablecoins are cryptocurrencies that hold a stable value against a fiat currency. There are USD, EUR, GBP, and several other fiat currency backed stablecoins.

Related: What is a stablecoin? How are they different from Bitcoin or Ethereum?


While there may be several different denominations of stablecoins, there are also different types of stablecoins. Each type of stablecoin is nuanced in the nature:

 

Related: Algorithmic vs 1:1 Backed vs Collateralised Stablecoins - Whats the Difference?

 

  1. Fiat or commodity collateralised stablecoins

    Fiat-collateralized stablecoins are the most straightforward category of stablecoins to understand. They have the backing of a fiat currency such as Euro, GBP, or the US Dollar. Fiat-collateralized stablecoins have a 1:1 ration backing implying that one stablecoin would be equal to one unit of currency such as a dollar or one Euro.

    Every fiat-backed stablecoin has real currency equivalent in a bank account . Users can redeem their fiat-based stablecoin as the entity managing it takes the equivalent value of fiat currency from their reserve and sends it to the user’s bank account. At the same time, the redeemed stablecoins are taken out of circulation or destroyed.

    The top 2 fiat-collateralized stablecoin by market cap are USD Coin (USDC) and Binance USD (BUSD).

    Commodity-backed stablecoins are backed by assets such as precious metals. The most common commodity used as collateral for commodity-backed stablecoins is gold.

    Other than precious metails, real estate, oil and other commodities form the basis for the market value of these stablecoins. The owners of such stablecoins exercise ownership over a tangible asset with real value.

    Commodities and thus commodity-backed stablecoins generally offer appreciation potential over time; and are also allow anyone to invest in commodities.

    Some more popular commodity-backed stablecoins include Tether Gold (XAUT) and Paxos Gold (PAXG)

  2. Overcollateralised stablecoins

    There are specific strategies in decentralised finance which allow users to access stablecoins by locking their cryptocurrency assets in vaults and borrowing against them.


A user often lock up more mainstream cryptocurrency assets such as Ether or Bitcoin and put that in a vault.

 

With this vault, the user can now mint a stablecoin, which is pegged to $1 against the collateral of your vault.


For this, the user locks up their Bitcoin or Ether and mints dollars against that. The vault then tracks the dollar value of the vault (i.e. the dollar value of Ether or Bitcoin, and calculates the collateral value). 


Because the assets in the vault are volatile, a user typically needs to put in (more than)>$1 of assets to mint $1 worth of assets. It’s not uncommon to require $2 of vault assets to mint $1 of stablecoins. 


This form of locking volatile assets and borrowing a percentage against them open up for interesting strategies within the decentralised finance sector.

  1. Algorithmic stablecoins

    What are algorithmic stablecoins? This is where things start to get a bit more complicated - and risky.

    Algorithmic stablecoins aim to use code to maintain a peg against the USD value. They do not have any collateral requirements. There have been several algorithmic stablecoin experiments in the cryptocurrency sector - with notable examples being UST from the Terra ecosystem. 

    UST was minted when the equivalent dollar amount of LUNA is converted. And UST is always redeemable for the equivalent dollar amount of LUNA. The system is designed to $1 is pegged to $1 worth of LUNA at any time.

    We have all seen the catastrophic effects of the peg breaking.

    This is not to say that stablecoins are unviable - yet it should be understood that they are currently highly experimental in nature and come with immense risk. 



Interested in learning more? Check out our other learning modules:

  • DeFi 101

    Decentralised Finance is an emerging field where smart contracts and decentralised technologies are allowing for innovative flows of transactions.

    Removing the middleman, means more benefits for the end user, you. Learn more about decentralised finance and what it means for you.

  • Finance 101

    Financial literacy unfortunately wasn’t taught in school, and now you’re trying to figure it out online. Don’t worry, here’s a great place to start. Dezy Learn breaks down basics of finance, starting with vocabulary and basic concepts so that you can use these as building blocks as you dive deeper down the rabbit hole.

    Check out Finance 101.

  • Inflation 101

    Inflation is rampant, prices for goods and services are rising. What are you doing to protect your money from inflation? Learn more about macroeconomic factors that are in motion within our inflation series. 
What is Dezy?

Dezy is a fintech that offers users access to decentralised finance yields. Dezy uses one to one backed stablecoins in a diversified strategy to produce up to 5.65% a year with 0 fees or lock-in. See how we bundle DeFi native insurance to protect funds in instances of smart contract vulnerabilities. 

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    Dezy Pte Ltd UEN: 202116623N, 80 Robinson Road, #08-01, Singapore 068898
    Disclaimers:
    1. Decentralised finance is an emerging field with fluid regulations and not without risk.
    2. Dezy is not licensed by the Monetary Authority of Singapore.
    3. Learn more about how we mitigate risk for consumer protection with insurance, diversification, and technical security measures.
    4. Dezy insurance coverage applies only to certain assets / protocols where insurance is applicable. Learn more about insurance.
    Dezy Pte Ltd UEN: 202116623N, 80 Robinson Road, #08-01, Singapore 068898