Stablecoins are a class of digital cryptocurrency that are designed to offer price stability and are backed by a reserve asset.

Stablecoins attempt to peg their market value to some external reference such as a currency like the U.S. dollar or to a commodity's price such as gold. Their price stability is achieved via collateralization (backing) or through algorithmic mechanisms of buying and selling the reference asset or its derivatives.

Advantages of asset backed Stablecoins are that coins are stabilized by assets that fluctuate outside of the cryptocurrency space, that is, the underlying asset is not correlated, reducing financial risk. Also, assuming they are managed in good faith, and have a mechanism for redeeming the asset/s backing them, Stablecoins are unlikely to drop below the value of the underlying physical asset, due to arbitrage.

Fiat-backed Stablecoins

Fiat-collateralized stablecoins maintain a fiat currency reserve, like the U.S. dollar, as collateral to issue a suitable number of coins. These reserves are maintained by third-party regulated financial entities and are regularly audited for adherence to the necessary compliance. Stablecoins backed by fiat money are the most common.

Example: USD Coin (USDC)

Cryptocurrency-backed Stablecoins

Crypto-collateralized stablecoins are backed by other cryptocurrencies and are conceptually similar to fiat-backed stablecoins. The significant difference between the two is that while fiat collateralization typically happens off the blockchain, the cryptocurrency asset used to back this type of stablecoins is done on the blockchain, using smart contracts in a more decentralized fashion. Since the reserve cryptocurrency may also be prone to high volatility, for such stablecoins a larger number of cryptocurrency tokens is maintained as reserve for issuing a lower number of stablecoins.

Example: DAI

Commodity-backed Stablecoins

Stablecoins backed by commodities such as precious metals (gold, silver etc.) have their value fixed to one or more of these commodities and are redeemable for such (more or less) on demand. The amount of commodity used to back the stablecoin has to reflect the circulating supply of the stablecoin. Therefore, holders of commodity-backed stablecoins can redeem their stablecoins at the conversion rate to take possession of real assets.

Example: Tether Gold (XAU₮)

To see which stablecoins are available at Instacoin ATMs, visit our rates page.

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