The Four Types of Stablecoins in 2021

The Four Types of Stablecoins in 2021

Investing is one of the best things that you can do for your own financial stability and wealth growth. If you are investing at all, you know that investing in crypto is the thing to do. 

Whether you use crypto for investing, sending peer-to-peer transfers, or are interested in the emerging widespread uses of cryptocurrency, you need to learn more about stablecoins

Here’s what you need to know about stablecoin and how it can be of use in 2021. 

What is Stablecoin? 

Stablecoin is a type of cryptocurrency pegged to a reserve asset with some established market value. Their primary aim is to keep the valuations of the cryptocurrency stable (unlike cryptos like Bitcoin or Ethereum). 

While there are hundreds of different, patented stablecoins in use right now, there are four main “types:”

  • Reserved based on the U.S. dollar or other fiat currency
  • Collateralized by another crypto, like Bitcoin
  • Backed by a commodity like gold
  • Modified by a smart contract algorithm

There are some natural fluctuations in the reserve asset but the idea is that the stablecoin will hold based on whatever that reserve asset is valued at. Therefore, users of that stablecoin would expect the coin to have a very similar value (nearly identical to how fiat coins are valued) so that they can expect to use that stablecoin in the future. 

Stablecoins aren’t perfect, but they are extremely useful and on the rise. They’ve gained traction in recent years because they still provide users with the unique benefits of blockchain technology, which include security, user privacy, and decentralization, while also offering some level of stability. 

By using another reserve or collateral, the stablecoin carries more value and remains relatively volatile-free (especially compared to Bitcoin and other non-stablecoin cryptocurrencies).

What Are The Four Types Of Stablecoin in 2021? 

As mentioned, there are four “types” of stablecoin currently available in 2021. We wanted to break these different types down so that users can have a better understanding of their pros, cons, and potential trends. 

1) Reserved Based on The U.S. Dollar or Other Fiat Currency

Stablecoins based on fiat collateral are the most popular. The most common stablecoin fiat-backed is the USDT (Tether), which has a one-to-one ratio with the U.S. dollar. 

The current reserve of Tether is only at 3.87% of the cash backing Tether, which makes solvency a little weakened. 

On top of that, Tether can’t actually be exchanged for U.S. dollars, but instead, it utilizes the U.S. to establish the value. Tether was specifically designed to bridge the gap between crypto and fiat currencies. 

Tether is one of the most popular stablecoins using this reserve. And it does come with some controversy since it was the source of a major hack in 2017 and a subsequent forking of the blockchain it was on. However, stablecoins have followed suit from Tether to provide more options for crypto stability. 

2) Collateralized by Another Crypto, Like Bitcoin

Other stablecoins can be backed by another cryptocurrency, like Bitcoin. Of course, supporting your crypto with crypto that is volatile means that maintaining stability is often harder. However, crypto is a very popular reserve token. 

By using crypto, more stablecoins can be created, and more cryptocurrency values can grow. 

When using crypto collateral, stablecoin usually accounts for 50% of swings in the reserve currency. However, this still requires that the asset is monitored and audited frequently. 

3) Backed By a Commodity Like Gold

Stablecoins backed by a commodity like gold works in very much the same way that crypto backed by fiat currencies work. The funds are held in a shadow bank, and the liquidity is never actually something that the investor can do. 

Instead, stablecoin investors using gold can monitor the value of gold or that commodity to understand the valuation of the stablecoin in possession. 

4) Modified By a Smart Contract Algorithm

The fourth type of stablecoin is not collateralized by anything (non-collateralized) and is instead modified by an algorithm. 

This technology utilizes a smart contract on a decentralized (blockchain) platform (usually Ethereum) and will run automatically to keep the coin stable. This is very similar to when central banks print banknotes to maintain valuations in fiat currencies. 

These tokens don’t have any reserves that the stablecoin is backed off of, but instead, the investors monitor the mechanism to watch it maintain stability. 

The consensus mechanism is what determines the agreement of the smart contract and how many tokens need to be added or decreased from the stablecoin to maintain equilibrium. 

How Stablecoin Can Be Used In 2021

As you can see, stablecoins were created to provide stability and use cases within the blockchain market. While stablecoins are not yet perfected, they still provide a viable avenue for using cryptocurrencies in 2021 and the future. 

Right now, stablecoins are used for peer-to-peer transactions (P2P), business-to-business (B2B) transactions, and business-to-customer (B2C) transactions. They can also be used for investing, trading into other cryptos, and even for paying wages. 

Sila uses the stablecoin SilaUSD, which is pegged to the U.S. penny as its asset, and users of the Sila API can create an app that facilitates sending Sila tokens, as a way of getting bespoke stablecoins into the hands of fintech investors. The API can also hold tokens in a digital wallet and send Automated Clearing House (ACH) payments to business partners, friends, or for making purchases. 

Since the Sila token is pegged to the penny, fluctuations are incredibly minor, and Sila users can expect more stability with the Sila token than stablecoins pegged to a dollar amount. It can also provide international money transfers since money can be transferred anywhere on the blockchain. 

Preparing For Stablecoin And The Future

Stablecoins that want to do well would be set up for transfers with any currency and throughout the world, like Sila!

The uses of stablecoin are widespread. One of the most exciting things about stablecoins and Sila is its decentralized nature. Therefore, stablecoins can be useful for getting money back into the hands of people who need it the most. 

There are situations globally where centralized banks have too much control over finances. And, therefore, blockchain technology and stablecoin can disrupt these systems and help support struggling economic infrastructure globally.