A stablecoin is a digital asset designed so its value experiences minimal volatility, or fluctuation in value, over time.
Cryptocurrencies are notoriously volatile, which increases the risk of holding them as an asset and dampens their use in retail due to the cost of hedging their value.
Stablecoins were developed to counter these problems. Stablecoins can be backed by and redeemable for an asset, such as a fiat currency, commodity, or different cryptocurrency, or they can be algorithmically controlled via programmable adjustments to their supply.
Backed stablecoins are the most common form of stablecoin in the current blockchain ecosystem. Fiat-backed stablecoins have a value pegged to one or more currencies, with the amount of the currency used to back the stablecoin adjusted based on the stablecoin’s circulating supply. For example, the USD Coin is a stablecoin with a value pegged to the US dollar, and every USDC is backed by a US dollar held in reserve. Fiat-backed stablecoins are frequently used by cryptocurrency exchanges because their relative stability simplifies fiat deposits.
Though less common, commodity-backed stablecoins operate in an nearly identical manner to fiat-backed stablecoins. Commodity-backed stablecoins, such as Digix Gold Tokens, pegged to the value of gold, can be redeemed for the physical commodity they represent. The amount of the commodity used to back the stablecoin must be adjusted based on the stablecoin’s circulating supply.
Cryptocurrency-backed stablecoins use other cryptocurrencies as collateral. However, while the collateral for fiat- or commodity-backed stablecoins exists off of the blockchain in physical stores of currency, the collateralization of cryptocurrency-backed stablecoins happens on the blockchain via digital currency holdings the stores of which are regulated via smart contract.
For example, DAI is a cryptocurrency-backed stablecoin designed to maintain a value equivalent to the USD dollar, but that value is collateralized by adjusting the amount of the MKR cryptocurrency on the blockchain rather than by adjusting an amount of cash held in reserve.
Algorithmically-backed stablecoins are not backed by any asset. Instead, they are designed so that their value remains stable via algorithmic changes to the circulating supply. This process is similar to how the value of fiat currencies is maintained via a central bank printing or removing cash from circulation to maintain a currency’s value—but with an on-chain algorithm or smart contract controlling the supply in response to demand.
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Bison Trails is a blockchain infrastructure platform-as-a-service (PaaS) company based in New York City. We built a platform for anyone who wants to participate in 23 new chains effortlessly.
We also make it easy for anyone building Web 3.0 applications to connect to blockchain data from 33 protocols with Query & Transact (QT). Our goal is for the entire blockchain ecosystem to flourish by providing robust infrastructure for the pioneers of tomorrow.
In January, 2021, we announced Bison Trails joined Coinbase to accelerate our mission to provide easy-to-use blockchain infrastructure, now as a standalone product line. The Bison Trails platform will continue to support our customers. With Coinbase’s backing, we will enhance our infrastructure platform and make it even easier to participate in decentralized networks and build applications that connect to blockchain data.