Underlying assets for stablecoins: pros and cons

Types of Stablecoins: Asset-Collateralized vs. Non-Collateralized

Pic. triangle of collateralization
Advantages of different types of collateral for stablecoins

Algorithmic

  • No need for collateral
  • Most decentralized and independent
  • They need constant growth of the system to work as intended. The nature of the system means there is a constant demand for the stablecoin to succeed which is not always guaranteed
  • Most vulnerable to crypto decline or crash, and cannot be liquidated during a crash
  • Difficult to analyze safety bounds or health
  • Complex scheme of implementation

On-chain

  • Decentralization
  • Fast liquidity
  • Transparency — easy for everyone to inspect the collateralization ratio of the stablecoin
  • Volatility — its price in general less stable than fiat
  • Inefficient use of collatering capital
  • Tied to the health of a particular cryptocurrency (or basket of cryptocurrencies), so can be auto-liquidated during a price crash into underlying collateral
  • Complexity of the scheme implementation

Off-chain currency based stablecoins

  • 100% price-stability (except for external factors)
  • Simplest model of all
  • More security, since no collateral is held on the blockchain it can’t be hacked
  • Centralized — need a trusted custodian to store the fiat
  • It can be expensive and slow to liquid into fiat
  • Highly regulated
  • Need regular audits to ensure transparency

Off-chain commodity based stablecoins

Volatility of different types of commodities
  • Efficiency of the capital
  • 100% ssset-backed
  • High liquidity
  • Simple scheme of implementation
  • Price stable
  • Centralization — you have to have the Keeper
  • Requires trust — this Keeper has to be trustworthy
Advantages and disadvantages of different types of collateral for stablecoins summarized

Instead of a conclusion

Stages of crypto evolution

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