Facts about stablecoins you should know
Stablecoins means those coin which price value remain stable or hardly fluctuate within a short range. Most of stable coin price value remain 1 dollar .
4 types stable coin generally exist
- Fiat backed stablecoin
- Commodity backed stablecoin
- Crypto backed stablecoin
- Algorithmic stablecoin
Fiat backed stablecoin
Fiat backed stablecoins are those stablecoins which company has reserved fiat fund as backup of circulating supply . Tether ( USDT ) is a fiat backed stablecoin. Suppose in crypto market the circulating supply of Tether ( USDT ) is 1 Billion . It means they have reserve cash fund of 1 Billion in Bank . Tether company will not increase the circulating supply in market until they increase the reserve fund . The example of Fiat backed stablecoin are USDT , USDC , TUSD .
In case of BUSD most of their fund are reserved and some reserved in BNB coin . So somehow we can say that it's a Fiat backed stablecoin also.
Commodity backed stablecoins
Commodity backed stablecoins are those kind of stablecoins which company has reserved precious metal as the same value of circulating supply in market. Precious metal can be Gold and Silver.One example of commodity backed stablecoin is PAX. Let me explain about it. Suppose in market there is 1 billion dollars supply of PAX which means Gold and Silver are reserved there and the current market value of those are 1 billion dollar. At the same time it has some cash Dollar reserved also.
Crypto backed stablecoin
Crypto backed stablecoins are such kind of stable coin which don't has any reserve Fiat/dollar fund. The reserve fund kept invested in their coin and other crypto coin . The example of crypto backed stablecoin is UST and USDD . In case of UST they reserved same value of circulating supply invested in LUNA coin and Bitcoin and in other some crypto.
Algorithmic stablecoins are those coins which don't have any backup or reserve fund or asset. It's a stable coin based on smart contract or algorithm with which it try to control the supply of that stable coin. In a word the supply of this kind of stable coin controlled by computerized program. The example of this kind stable coin is USDD and UST.
USDD and UST both are algorithmic stablecoins and at the same time both are Crypto backed stablecoin .
Hope that I am able to give little introduction to understand about stable coin. Now one question is coming everyone's mind that
which kind of stable coin are safe . ?
According to my opinion and some other experts opinion Commodity backed stablecoins and Fiat backed stablecoins are safe comparing Algorithmic stablecoins and Crypto backed stablecoin . After knowing the types of stablecoins I think you can understand that why both kind of stable coins are not safe . Firstly Crypto is not stable things because of what Crypto backed stablecoin are not safe . And algorithmic problem can occur in anytime because of what you may suffer huge loss although your aseet are in stablecoins and that is the reason of why algorithmic stable coins are not safe. TerraUSD ( UST) is the best example of it. Because of that reason many people lost their asset and it was also have reason behind the market dump.
Tether ( USDT) vs TerraUSD (UST)
Few days ago because of algorithmic problem TerraUSD ( UST) price dumped more then 60 % within a short time. And I think you know the current price of it.
After these incident many people started to say that no stable coin are safe and any stable coin can dump like TerraUSD ( UST ) . I think because of that reason little fluctuation occured in Tether ( USDT ) . Because of this for a little time USDT price came below 95 cents. But it stabilized again. So many people were in fear thinking that Tether ( USDT ) is going to face the same situation like TerraUSD ( UST ) .
But the fact is Tether ( USDT ) it's not going to face the situation like TerraUSD ( UST ) . It's true that both are stable coin but both are different kind of stable coin. Tether ( USDT ) is a fiat backed stablecoin which means they have the cash fund to stabilize if fluctuation occur in Tether ( USDT ). On the other hand TerraUSD ( UST ) is a algorithmic and crypto backed stablecoins. Algorithmic problem occurred and besides the crypto market was down that time because of what TerraUSD ( UST ) was unable to stabilize the price. But in case of Tether ( USDT ) there don't exist such kind of thing and because of it , it's more safer than TerraUSD ( UST ) .
My suggestion : As I said Fiat backed stablecoins and Commodity backed stablecoins are moderately safe compared to others. I think diversify the asset in several kind of Fiat backed stablecoins and commodity backed stablecoins is the good strategy to minimize the risk.
All the information & analysis i made on the basis on google and youtube videos ( specially the channel of Crypto notes) .