A perfect example of an asset backed crypto is known as a ‘stablecoin’. Stablecoins are a type of crypto currency that maintains stability in terms of price in relation to an asset with a stable worth like a U. S. Dollar.
Types of stablecoins:
Stablecoins are of two types,
- Algorithmic coins
- They usually rely on the liquid market of the digital bonds in order to expand and contract the supply of the stablecoin thereby creating stability in the stablecoins. Algorithmic coins have a major benefit that provides automation and stability that is not feasible with the collateral backed coins.
- Example: Basis. It pegs its value to the Dollar and controls the value of the stablecoins that are in circulation.
- Collateral backed coins
- They rely mainly on collateral to back the value (worth) of the coins and can be in U. S. Dollars, euro, gold or any other stable asset. The collateral is usually placed in a financial institute like a bank to ensure that it is enough to cover the amount of the outstanding obligations.
- Example: Paxos standard and the Gemini Dollar.
Unlike the more volatile ICO tokens or crypto currencies, stable coins fail one of ‘Howey factors’ namely, a purchaser of the stablecoin will expect the value of the coin to remain the same. While many people have reduced using the ICO software and started going after stablecoins, the global capital market specifies that the crypto currency market is now seeing a rise in the use of stablecoins which are now growing in popularity among the start-ups.
