The idea of a stablecoin, backed by traditional assets like government bonds and real estate, has been gaining traction in recent years. What exactly is a stablecoin? An answer might be found by first defining bitcoin. Bitcoin was initially designed as a digital currency without any central authority or governing body. More quick learning on cryptocurrency is available through exchanging information like BitQS online.
The system ensures that Bitcoin will not lose purchasing power to inflation over time; this comes from the cryptographic techniques used in its design to ensure that it cannot be created infinitely and will always have a limited number of total coins available for worldwide circulation. In addition, the proponents of Bitcoin praise its decentralized nature, in contrast to the fiat currencies of many states today.
A stable currency is not designed to lose purchasing power over time. Understanding that a stable currency is not necessarily a cryptocurrency like bitcoin is essential. A cryptocurrency like bitcoin has no intrinsic value outside of the value that its primary trading partners ascribe to it at any given moment in time. A stablecoin is backed by some traditional asset or asset pool, with buying and selling between buyers and sellers transacted through blockchain-based exchanges. Let’s discuss the differences between Stablecoins and bitcoin in detail.
Difference between Stablecoins and bitcoin
Intrinsic value
Bitcoin has no intrinsic value in the sense that it is not backed by any physical commodity (like gold or silver) or asset, but rather its value purely derives from the demand for it and its acceptance as a form of payment from its trading partners.
A stablecoin, on the other hand, will typically be backed by a fiat currency like the United States Dollar or Euro. The value of these coins is not derived from their demand and acceptance as a form of payment. Still, instead, users will fix their value to some significant fiat currency at a ratio representing a 1:1 exchange with that currency.
A stablecoin will most likely be used to pay for goods and services, but its primary use case will be a store of value. Moreover, it results in its stability against significant global currency fluctuations and inflation. Therefore, it should make the stablecoin more appealing than bitcoin as an instrument for saving/storing purchasing power over time.
Types of Stablecoins
Fiat-Collateralized Stablecoins
A fiat-collateralized stablecoin is a type of cryptocurrency that uses traditional assets or pools of assets (mostly fiat currencies) as collateral to back the issuance and supply of that currency. One of the key differences between a fiat-collateralized stable coin and other types is that the stablecoin does not use its crypto-currency token as collateral but instead uses some other form of wealth.
Crypto-Collateralized Stablecoins
A crypto-collateralized stablecoin is a type of cryptocurrency that uses its native crypto tokens as collateral to back issuance and supply. The supply of the currency is controlled by a smart contract, which will only issue the stablecoin based on the collateral held in its favour.
Crypto-centric Stablecoins
A crypto-centric stablecoin is a type of cryptocurrency that attempts to mimic the core attributes of fiat currencies, such as price stability and conversion rate stability. They are often not technically backed by any physical assets or assets pools but instead algorithmically controlled to maintain or achieve a predetermined price target, like 1 dollar = 100 tokens. As a result, they are sometimes called algorithmic stablecoins. A crypto-centric stable coin will attempt to be a legal Tender in its jurisdiction of operation and should result in all income being taxed as ordinary income.
Commodity-collateralized
A commodity-collateralized coin is a type of stablecoin with each coin representing a claim on a fixed quantity of the underlying commodity. There are two main types of commodity-backed coins: those that hold the physical commodity and those backed by a representative claim, such as a receipt for the underlying asset. Commodity-backed coins may not be legal Tender in some jurisdictions.
Commodity-centric
A commodity-centric stablecoin is a type of cryptocurrency whose value is tied to the price of one or more commodities through market trading, without holding any physical assets or issuing IOUs to back their value.
Difference between price stability of bitcoin and stablecoin
In the past, when bitcoin was still in its infancy, the price of 1 bitcoin fluctuated wildly. One day, a bitcoin would be worth $1,000; a few months later, it could cost as little as $300. It is an example of the instability to which bitcoin has been prone at times early on in its existence Stablecoins are designed to maintain their fundamental value throughout time and not to escalate or decrease drastically based on external factors such as market volatility or widespread disruption.
