Concept

A SC (stablecoin) is a cryptocurrency (or a digital token) that derives its value from real-world assets (RWAs), such as commodities, precious metals, real estate, or other tangible assets, intangible assets or financial assets. It is a digital asset whose value is pegged to a reference asset, which is either fiat currency, exchange-traded commodities (such as precious metals or industrial metals), or another cryptocurrency. SC (also, asset-backed cryptocurrencies) are created by establishing a sort of link between the value of the digital token to the underlying asset using blockchain technology. The value of this asset-backed token (ABT) or backed crypto asset is referenced to the performance and market value of the asset it represents.

Linkage to an underlying asset provides stability mechanism to the performance of a cryptocurrency and reduces the volatility that most cryptocurrencies are characterized with. Using real-world assets as underlying makes such coins a more secure and less volatile investment vehicle. The referenced physical assets or other digital assets have a sort of stable value, whereby supporting such the stability of such a token. The underlying assets may widely vary depending on the scope of tokenization, including real estate properties, precious metals like gold or silver, commodities, or artworks, and collective interests (fanship).

Volatility reduction

A SC is created and issued converting ownership of real-world assets (RWAs) into digital tokens. The linkage helps reduces the volatility of a token thanks to the direct relation between the value of the cryptocurrency and tangible assets. This instills the aspects of confidence and stability in the tokens as investment compared to highly speculative cryptocurrencies. Furthermore, the currency allows investors to have fractional ownership of valuable assets- that is, a portion of the asset without having to purchase the whole of it.

Features

SCs bring together the solid features of underlying physical or financial assets and the huge potential of blockchain technology, particularly, ease of use and deployment, efficiency and time effectiveness. In contrast to unbacked (no back) cryptocurrencies (Bitcoin or Ethereum), SCs provide further protection, and hence have a certain protection mechanism against rampant volatility and the side effects of speculation. As a result, these coins are more stable and less volatile their unbacked equivalents. Tether (USDT), the first SC, was introduced in 2014 and at once became a stable form of currency for market participants seeking a more reliable substitute for the volatile cryptocurrencies.

Main types of SCs

The main types of SCs include crypto-backed stablecoins, algorithmic stablecoins and fiat-backed stablecoins (for more, see: types of stablecoins).