The crypto market has various types of assets such as stable cryptocurrencies and more volatile cryptocurrencies such as Bitcoin.
In this article we will try to analyze both types of cryptocurrencies and understand their similarities and differences.
Stable cryptocurrencies are a type of cryptoassets that are supposed to have a lower volatility compared to Bitcoin as they are backed by other types of assets such as the dollar, the euro, among other support.
It aims to combine the advantages of cryptocurrencies, such as speed, security and decentralization, with the stability of fiat currencies, such as predictability, trust and acceptance.
The difference with Bitcoin is that it does not have any backing or guarantee, but rather its value depends on market supply and demand, which makes it very volatile and speculative. Bitcoin can rise or fall in price dramatically in a matter of hours or days, making it difficult to use as a means of payment or store of value.
There are different types of stable cryptocurrencies depending on the mechanism they use to maintain their parity with the reference asset. The most common are:
• Cash-backed stablecoins: are those that are backed by an equivalent amount of fiat currency or another liquid asset, which is stored in a custodian entity or bank account. For example, USDT or Tether is backed by US dollars.
• Cryptocurrency-collateralized stablecoins: These are those that are backed by an equivalent amount of another cryptocurrency, which is deposited in a smart contract or wallet. For example, DAI is backed by ETH or Ethereum.
• Algorithmic stable cryptocurrencies: these are those that do not have any support, but rather adjust their supply through algorithms or programmed rules, which try to maintain the balance between demand and supply. For example, the AMPL or Ampleforth modifies the number of tokens in circulation according to the market price.
Each type of stablecoin has its advantages and disadvantages, which depend on factors such as trust, transparency, liquidity, security and regulation.
In general, cash-collateralized stablecoins are the simplest and most popular, but also the most vulnerable to legal, financial, and operational risks.
Cryptocurrency-collateralized stablecoins are the most decentralized and transparent, but also the most complex and volatile. Algorithmic stablecoins are the most innovative and flexible, but also the most experimental and uncertain.
