Stablecoins are digital currencies that are correlated with the value of US dollar and function on blockchain, with capital efficiency, decentralisation and peg stability being its three main objectives, according to Cointelegraph. The main kind of stablecoin are centralised stablecoins which are led by Tether and incorporate certain liquid assets and commercial paper on its balance sheet.
As stated by Cointelegraph, algorithmic stablecoins TerraUSD are backed by collateral to reduce the price volatility of a specific asset such as US dollar. While Terra USD follows a capital-efficient design, it carries the disadvantage of trading at a certain discount and being vulnerable to speculative attacks. Since stablecoins’ algorithms are based on auditable codes, they help to increase investors’ confidence. A ‘two-coin’ system is an algorithmic stablecoin structure in which one coin is used to absorb market volatility and the other helps to keep the peg. The different kinds of stablecoins are mentioned below:
Rebasing algorithmic stablecoins
Rebase-style stablecoins manage price-elastic ERC-20 tokens, that is, stablecoin’s total supply is not fixed and modified regularly. The Ampleforth protocol has a feature called rebasing that changes token supply.
Seigniorage algorithmic stablecoins
For algorithmic stablecoins, the seigniorage model has stablecoins and seigniorage ownership. With increase in price of a currency, shares are utilised to increase the supply of coins. Seigniorage based stablecoins issue a redeemable bond as an incentive for buyers when price falls below the peg.
Fractional algorithmic stablecoins
Fractional-algorithmic stablecoins combine the features of fully-algorithmic and collateralised stablecoins. These kind of stablecoins help to avoid over-collaterisation and have lesser custodial risks, and is aimed to enforce a tighter peg with a more level of stability. Frax is considered the first stablecoin implementation to use the partial-collateral protocol that provides a two-token architecture, in which FRAX provides a one dollar based stablecoin and FXS as a governance token.
(With insights from Cointelegraph)
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