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Are the stablecoins really as stable as they say they are? Can you exchange any for real life cash? Let&#39;s take a quick look at the different types below! Stablecoins, are digital assets designed to maintain a stable value, they have gained significant attention in the crypto industry in recent months with notable events like Terra&#39;s UST collapse to boot. While stablecoins promise to provide the benefits of cryptocurrencies, such as fast and cheap transactions and immutability, without the price volatility, there are several different types of stablecoins that you should know about. In this short piece we will cover algorithmic stablecoins, fiat-backed stablecoins and asset-backed stablecoins, their roles and use in the market and a couple recent events that have caused some to loose faith in the industry. Algorithmic Stablecoins Algorithmic stablecoins, also known as non-collateralized or &#39;seigniorage&#39; stablecoins, are a type of stablecoin that uses complex algorithms and smart contracts to maintain price stability. These stablecoins do not have any physical collateral backing them, and instead rely on the trust of the holders and the stability of the underlying algorithms to maintain their value.One of the main advantages of algorithmic stablecoins is that they do not require the purchase and storage of any physical collateral like gold or cash which can be expensive and time-consuming. Instead, the stability of the stablecoin is maintained through a combination of supply and demand dynamics and algorithmic adjustments. The most common approach to create an algorithmic stablecoin is having a smart contract that issues new tokens when the price of the stablecoin falls below a certain threshold, and burns tokens when the price rises above a certain threshold. This process, known as &#34;expansionary and contractionary monetary policy&#34;, helps to maintain the value of the stablecoin relative to the target price.There are several different types of algorithmic stablecoins, including those that use a single collateral asset and those that use a basket of assets as collateral. One of the main risks of algo stablecoins is the potential for the underlying algorithms to fail or be exploited. If the algorithms are not robust/have not been audited, or are manipulated easilly, it could lead to the destabilisation and potentially result in significant losses for the holders. Algorithmic Examples Arguably the biggest and most prominent example of an algorithmic stablecoin failing was the collapse of $UST (UST was created by Terraform Labs). <a href="https://www.youtube.com/watch?v&#61;GFqCLjeYJaY" rel="noopener noreferrer nofollow">Despite seeing insane growth in 2021</a>, UST reached a height of <a href="https://www.coingecko.com/en/coins/terraclassicusd" rel="noopener noreferrer nofollow">18b mCap</a> on 9th of May 2022 and in no-less than 4 days, the $1 stablecoin was trading at $0.02 with billions of bad debt in Anchor (TFL&#39;s lending facility) and thousands of people out of pocket. At the point of writing, $UST has been re-branded as $USTC and exists mostly on exchanges still hovering at 0.02 and waiting for someone/thing to try and re-peg it. If we want to focus on stablecoins which have failed we could just hi-jack the rest of the article and write about every single one here- we probably wouldn&#39;t have enough space though. $USDN issued on the WAVES blockchain is another prominent example of a stablecoin which just isn&#39;t fit for purpose in it&#39;s current state. <a href="https://en.cryptonomist.ch/2022/04/05/usdn-failure-algorithmic-stablecoin/" rel="noopener noreferrer nofollow">USDN has been battered</a>, sitting at $0.42 at the time of writing, the stablecoins value is a far cry from its peg of $1. <img src="https://academy-public.coinmarketcap.com/srd-optimized-uploads/ee18a8c803734a17b7c9f89afb590357.png" /> Looking at &#39;sucessfull&#39; algorithmic stablecoins and the list gets a lot shorter. <a href="https://app.openocean.finance/CLASSIC#/FANTOM/WFTM/MIM" rel="noopener noreferrer nofollow">$MIM</a> or<a href="https://www.google.com/url?sa&#61;t&amp;rct&#61;j&amp;q&#61;&amp;esrc&#61;s&amp;source&#61;web&amp;cd&#61;&amp;cad&#61;rja&amp;uact&#61;8&amp;ved&#61;2ahUKEwjwmZiM0K78AhVikFwKHTE4DQ0QFnoECAsQAQ&amp;url&#61;https%3A%2F%2Fabracadabra.money%2F&amp;usg&#61;AOvVaw1rJDcVHCEnlJHqg2IbQWHN" rel="noopener noreferrer nofollow"> &#39;Magic Internet Money&#39; </a>is an example of an algo stable which uses pooled user deposits to issue its tokens, whilst volatility shouldnt be the name of the game in regards to stables, algo coins like <a href="https://app.openocean.finance/CLASSIC#/FANTOM/WFTM/MIM" rel="noopener noreferrer nofollow">MIM</a> fluctuate mildly off-peg due to demand but more or less hold their respective $1 values. Honourable mention definitely goes to to <a href="https://app.openocean.finance/CLASSIC#/ETH/ETH/FRAX" rel="noopener noreferrer nofollow">$FRAX</a> by <a href="https://www.google.com/url?sa&#61;t&amp;rct&#61;j&amp;q&#61;&amp;esrc&#61;s&amp;source&#61;web&amp;cd&#61;&amp;cad&#61;rja&amp;uact&#61;8&amp;ved&#61;2ahUKEwiitcSc0K78AhVCZcAKHQPuBJkQFnoECAsQAQ&amp;url&#61;https%3A%2F%2Ffrax.finance%2F&amp;usg&#61;AOvVaw17SWhz38wbDCwHafL1-0EY" rel="noopener noreferrer nofollow">Frax Finance</a>. Frax promises the first fractional stablecoin and crypto native consumer price index. Frax has shown that the fractional reserve stablecoin can work... for now. Time will tell if <a href="https://app.openocean.finance/CLASSIC#/ETH/ETH/FRAX" rel="noopener noreferrer nofollow">FRAX</a> model is truly fit for growth once bullish market conditions return, however with the recent communication from their team regarding <a href="https://app.openocean.finance/CLASSIC#/ETH/ETH/FRAX" rel="noopener noreferrer nofollow">FRAX</a> staked ETH and their opacity with collateral assets, <a href="https://app.openocean.finance/CLASSIC#/ETH/ETH/FRAX" rel="noopener noreferrer nofollow">FRAX</a> could just be heading in the right direction and could make the algo stable sector boom. FIAT Backed Stablecoins FIAT backed stablecoins are backed by a reserve of FIAT-assets, such as fiat currency, gold or bonds which are held in a custodial account. The value of the assets behind asset backed stablecoins is generally more stable than that of algorithmic stablecoins, as they are directly tied to real-world assets. The reason these assets have grown significantly in popularity is that USDC and USDT are both redeemable at any time for the underlying $1 value. However, they may be subject to the same risks as the assets they are backed by, such as base currency devaluation or asset price fluctuations. The FIAT backed stablecoin industry isn&#39;t without it&#39;s dramas and confidence has definitely been tested the last couple years, with <a href="https://www.cryptovantage.com/news/will-tether-be-classified-as-a-security-and-sued-by-the-sec/" rel="noopener noreferrer nofollow">Tether being mired in controversy with the SEC</a> ever since it&#39;s inception over 8 years ago. However <a href="https://app.openocean.finance/CLASSIC#/ETH/ETH/USDC" rel="noopener noreferrer nofollow">USDC</a> and <a href="https://app.openocean.finance/CLASSIC#/ETH/ETH/USDT" rel="noopener noreferrer nofollow">USDT</a> still both remain the largest single issuers of stablecoins and their departure of any of these two tokens from the markets could have significant effects longterm. Asset Backed Examples <a href="https://app.openocean.finance/CLASSIC#/ETH/ETH/USDT" rel="noopener noreferrer nofollow">$USDT</a> and <a href="https://app.openocean.finance/CLASSIC#/ETH/ETH/USDC" rel="noopener noreferrer nofollow">$USDC</a> these are the two largest centralised stablecoins, meaning they both have a central issueing authority and respectively command over 110b in total mcap which is just under 1/8th of the entire crypto mcap. So you can see that there exists a demand for stablecoins and at current these are the two biggest players in the game. One negative is that we have to trust that both of the issuers of their stablecoins actually have the reserves they say, both companies have been mired in controversy in relation to the secure auditing and reliability of the reserves. Tether, the issuers behind <a href="https://app.openocean.finance/CLASSIC#/ETH/ETH/USDT" rel="noopener noreferrer nofollow">USDT</a> claim that for <a href="https://tether.to/en/transparency/" rel="noopener noreferrer nofollow">every $1 of USDT they have $1 of cash</a> on hand to back it up, similarly with Circle the <a href="https://app.openocean.finance/CLASSIC#/ETH/ETH/USDC" rel="noopener noreferrer nofollow">USDC</a> issuer, their collateral is made up of a mix of <a href="https://www.circle.com/en/usdc" rel="noopener noreferrer nofollow">cash, bonds and short dated US-treasuries</a> which would seem to support their argument for reserves. However, we don&#39;t know exactly if Tether or Circle can still support their stablecoins in times of increasing regulatory control- what we do know is that even in times like these, one thing still remains. People flood to stablecoins in times of distress which just goes miles to showing their importance in the industry. If you want peace of mind with stables, <a href="https://app.openocean.finance/CLASSIC#/ETH/ETH/BUSD" rel="noopener noreferrer nofollow">BUSD</a> on the surface might appear to be the most &#39;upfront&#39;. Created by Binance but issued by Paxos, <a href="https://app.openocean.finance/CLASSIC#/ETH/ETH/BUSD" rel="noopener noreferrer nofollow">BUSD</a> stablecoin dollars on Ethereum chain are openly backed 1:1 with real world cash and <a href="https://www.binance.com/en/feed/post/119490" rel="noopener noreferrer nofollow">openly supported as a &#39;regulated stable&#39;</a> by the NYDFS in the USA. Steps taken to show proof of funds and availability of cash go miles towards letting community members know their money is in safe hands. Crypto Asset Backed Finally, there are crypto asset-backed stablecoins, which are only backed by a single or handful of cryto tokens. Asset stablecoins are often issued by organizations or individuals and may be used as a medium of exchange within a particular community or for a specific purpose. While asset stablecoins may be convenient and easy to use, they are the most risky of the stablecoin types, as they are not backed by any real-life tangible assets and rely solely on the trust and reputation of the issuer and the underlying crypto asset. For example a &#39;crypto asset backed&#39; stablecoin could be 200% collateralised as per mechanic requirements. Say you have 1000 &#39;Token A&#39;, if Token A was to then lose 50% of it&#39;s value overnight (something which this industry is quite capable of), and the mcap of the circulating supply of stablecoins stays the same, then the token would only be 100% collateralised and thus your colatteral position would be wiped. It&#39;s this very point, the collateralisation of stables with coins that can significantly change in value, which has been the contributing factor in the downfall of Terra $UST and $USDN of Waves. Crypto Asset Backed Examples One of the best examples of stablecoins backed by crypto assets continues to be <a href="https://app.openocean.finance/CLASSIC#/ETH/ETH/DAI" rel="noopener noreferrer nofollow">$DAI</a> by MakerDAO. <a href="https://app.openocean.finance/CLASSIC#/ETH/ETH/DAI" rel="noopener noreferrer nofollow">$DAI</a> is an overcollateralised stablecoin <a href="https://daistats.com" rel="noopener noreferrer nofollow">backed mostly by $USD and $ETH</a>. DAI holds the majority of its backing in various crypto assets, however thanks to MakerDAO&#39;s PSM or Peg stability module&#39; crypto users are able to arbitrage <a href="https://app.openocean.finance/CLASSIC#/ETH/ETH/DAI" rel="noopener noreferrer nofollow">DAI </a>and <a href="https://app.openocean.finance/CLASSIC#/ETH/ETH/USDC" rel="noopener noreferrer nofollow">USDC</a> whenever the peg leaves the $1.00 mark meaning an overall tighter peg and sustained confidence in the token. However there are many examples of cryto-asset backed stables that have not faired well at all, the most prominent example is that of Iron and Titan by Iron Finance in the summer of 2021. $TITAN being the crypto asset that backed the $IRON stablecoin, was responsible for the rapid growth and subsequent demise of the platform. In the case of the TITAN token collapse, the time frame between its price feed oracle and the actual real-time prices of the market was too large causing users to become unprofitable and not protect the stabilisation. Long story short, it crashed. <img src="https://academy-public.coinmarketcap.com/srd-optimized-uploads/86fb0eeff5304aab8fe300f3365fcecb.jpeg" />And whilst it hasn&#39;t outright failed, we will include it here because more often than not the &#39;stable&#39; coin is off-peg. $USDD the crypto asset backed stable pioneered by Justin Sun and the TRON Dao reserve is one of the larger stables with the redeem/mint feature but has yet to be pegged to a solid $1 for longer than a couple days, raising quieries if the actual ecosystem in which the redeem/mint feature operates is actually working- in many ways it shares a lot of similarities to Terra and UST. It just goes to show that whilst we&#39;re still in this emerging new technology phase there still exists an oppurtunity for someone to come along and make the best stablecoin. There are more and more <a href="https://www.bankofengland.co.uk/research/digital-currencies" rel="noopener noreferrer nofollow">government agencies looking to involve CBDC&#39;s</a>, so we might get a whole selection of official government coins as soon as they realise that <a href="https://www.google.com/url?sa&#61;t&amp;rct&#61;j&amp;q&#61;&amp;esrc&#61;s&amp;source&#61;web&amp;cd&#61;&amp;cad&#61;rja&amp;uact&#61;8&amp;ved&#61;2ahUKEwio9I6ey678AhUPh1wKHcZuAjoQFnoECA4QAw&amp;url&#61;https%3A%2F%2Fwww.bankofengland.co.uk%2Fresearch%2Fdigital-currencies&amp;usg&#61;AOvVaw2gRd5mj-eoMMiH48UnV3qY" rel="noopener noreferrer nofollow">local foreign banks</a> control their own elastic cash supply through digital currency control. Conclusion In conclusion, stablecoins are a fascinating type of digital asset for the forseeable future, with so many actors in this space looking to make the next big stablecoin, we have to ask ourselves what is the future going to hold? Is the future is going to have multiple stables, a possible new kid on the block? or are all of us just falling back on good old <a href="https://app.openocean.finance/CLASSIC#/ETH/ETH/USDT" rel="noopener noreferrer nofollow">USDT</a>? While there are many different types of stablecoins, including algorithmic stablecoins and both fiat and asset backed coins, each has their own strengths and weaknesses and each needs to be considered carefully when considering any trading into or out of these tokens. Make sure that whatever stablecoin you&#39;re trading/holding, to do so through <a href="app.openocean.finance" rel="noopener noreferrer nofollow">OpenOcean</a>. In the mindset of open and free thinking <a href="app.openocean.finance" rel="noopener noreferrer nofollow">OpenOcean</a> does just that, it&#39;s a dex aggregatoe that let&#39;s you trade whatever you want on any of the supported 18&#43; chains and on over 200&#43; dexes. <a href="app.openocean.finance" rel="noopener noreferrer nofollow">OpenOcean</a> was made to put the power of trading back in your hands. Anything contained in this article is not financial advice.

Stablecoin or Fablecoin: Demystifying the different types of stablecoin!

OpenOcean

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