In a volatile crypto market, developers found a way to stabilize trade. That solution was the invention of stablecoins introduced in the market in 2014. Stablecoins are digital currencies linked to an asset or a currency. Some preferred assets include gold, precious metals, and fiat currencies such as the dollar, euro, and yen.
The US Dollar backs the majority of stablecoins circulating the DeFi ecosystem. As a result, value fluctuations of digital currency are minimized. On the other hand, un-pegged high-end digital coins such as ethereum and Bitcoin are prone to sudden ups and downs. In 2014 Tether was the first stablecoin launched, and since then, other stablecoins have been modeled to fit Tether’s mold.
Types of Stablecoins
Stablecoins attempt to bridge a gap between fiat currencies and digital currencies. Their existence bases operations on working mechanisms, and they exist as:
- Fiat-collateralized stablecoins: Fiat currencies are the most used collateral for crypto coins. These coins maintain fiat currencies reserves such as the Japanese Yen, US Dollar, and Turkish Lira.
- Precious metals-collateralized stablecoins: other cryptocurrencies peg to the precious metals such as gold or silver. In addition, commodities such as oil and petroleum cover bases as collateral.
- Crypto-collateralized stablecoins: these types of coins are collateralized and backed by other cryptocurrencies. Since both cryptocurrencies could be highly volatile, they are hence over-collateralized to ensure stability.
- Non-collateralized algorithmic stablecoins: these coins have no backing reserve. However, they have an operational mechanism like that of a central bank to ensure stability. They implement smart contracts to increase and decrease tokens in circulation according to the demand.
What are CBDCs (Central Bank Digital Currencies)?
CBDCs have emerged in recent financial times. Governments, Banks, and institutions are working round the clock to introduce digital currencies feasible in global markets. Researches by the Bank of international settlement report that over 80% of central banks worldwide embrace CBDCs and are exploring user cases.
Cryptocurrencies are volatile and decentralized in nature. As a result, global governments had no way around the crypto market. CBDCs cover electronic forms of currencies issued by governments’ central banks for a particular region or nation. If and when a country issues a CBDC, economies consider it a legal tender worldwide.
Different Types of Central Backed Digital Currencies
According to target users, CBDCs fall into two preferable classes. On the one hand, there are Retail CBDCs that operate on distributed ledger technologies. They are available anonymously and function all round the clock. Its main agenda serves the general public, additionally reducing costs of printing physical cash.
The second category involves Wholesale CBDCs are an excellent fit for financial institutions. Specifically, they increase payments security and resolve liquidity risk aspects of digital currencies. As a result, wholesale CBDCs are majorly favored compared to the existing form of traditional currencies worldwide.