"Will $USDT fail like $UST?"
To answer this question we need to understand the type of stable coins out there! 🧐
"They're built different"
HERE IS A THREAD DISCUSSING DIFFERENT TYPE OF STABLE COINS.
lets dive-in 🧵👇
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Introduction:
Stable coins are cryptos whose value is pegged to a real world asset like $USD, Gold etc
eg: USDT, PAXG, DAI, BUSD etc.
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Why should you care?
Its very important to understand working of different stable coins because you deal with many stables when you are investing in crypto, and some stables may carry more risks than others.
So it'll help you stay out of riskier stables.
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There are mainly 4 type of stables:
- Fiat backed
- Commodity backed
- Algorithmic
- Crypto backed
lets dive-in more in to more details 👇
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#1 FIAT BACKED STABLES
These are stables which are fully collateralised by fiat currencies like $USD in the ratio 1:1
Examples: $USDT, $USDP.
For eg:
For every $USDP minted, they will secure 1$ in bank as cash. So, if there is 1M $USDP circulating, there will be $1M in bank
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In other words,
you can mint 1 $USDP by giving @PaxosGlobal (company that issues $USDP) 1$. Also you can claim real 1$ for your $USDP at any time you need, by burning your $USDP
👉 Fiat backed stables are more safe comparing to other types but they work in a centralised model
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#2 COMMODITY BACKED STABLES
As the name suggests, these are stables backed by commodities. Most commonly gold.
Examples:
- $PAXG (Paxos gold) which is backed by real gold. So, you can consider buying $PAXG like buying digital gold.
& You can redeem your $PAXG for real gold.
- $DGX (digix gold) which is also backed by real gold and can be redeemed for real gold.
👉 They too work in a centralised model but it is a cheap, fast & effortless method to transfer commodities over internet.
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#3 ALGORITHMIC STABLES
These are stables whose peg is maintained by algorithm as the name suggests.
They are collateralised with little or no assets. (Can be said as under collateralised)
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The algorithm controls the supply of the coin. It increases or decreases supply of coin in order to maintain the peg.
For eg:
If the respective stable's price go below the intended peg, then the algorithm buys back excessive coin from the market and burns them.
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Likewise, If the stable's price go above the intended peg, the algorithm creates more supply & will dilute the supply inorder to bring the coin back to the peg.
Example: $UST, I think I don't need to explain more kek.
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👉 While they are the most decentralised form of stablecoins, they pose higher risk than normal fiat or commodity backed stable coins.
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#4 CRYPTO BACKED STABLE COINS
Simple as the name suggests, these are stable coins collateralised by cryptos.
But, as we know cryptos are too volatile to be kept as a collateral. So, CRYPTO BACKED STABLES are over-collateralised inorder to absorb the price variations.
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Meaning, You need to put more collateral than the value of the stablecoin inorder to mint it.
Example:
$DAI - $DAI is an over-collateralised stable coin made by @MakerDAO
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For eg, You need to put $ETH of value $1.5 as collateral inorder to mint a $DAI (1$)(over-collateralised).
Collateral ratio needed to mint $DAI will vary from 101% to 175% according to the crypto that you use as collateral.
$DAI is governed by $MKR token holders
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👉They too work in a decentralised model but is a bit more complex than other stables.
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TL;DR
# Fiat backed stables are bckd by fiat currencies such as $USD
# Commodity backed stables are bckd by commodities like gold.
# Algorithmic stables are under collateralised & depends on an algorith to maintain peg
# Crypto backed stables are backed by cryptos like $ETH
Wow you made it here, GREAT!!
Thats all what I've to discuss. If you learned something new from this thread,
Please give a RT & ❤️ in the 1st tweet.
Also, Follow me for more: @ajcrypto333
Auf Wiedersehen Freund 🥷
AJ CRYPTO (🪡,🧵)
@ajcrypto333
intern @playainetwork | social media @exaprotocol | | 19yo breaking down everything web3 like you're 5 🪡