Discussion of algorithmic vs. asset-backed stablecoins, risks, and regulatory developments

in hive-183397 •  3 months ago 

There are two basic types of stablecoins: asset-backed and algorithmic. Both seek to maintain price stability but differ largely in mechanism, risk involved, and regulatory challenges.

First come the asset-backed stablecoins, such as USDT (Tether) and USDC (USD Coin), pegged to traditional assets, which can be fiat currencies or commodities stored in some kind of reserve. It should be a reserve that really supports, in terms of accessibility to the asset, thus building a cushion of stability and confidence among the investor fraternity. Yet, there remain issues of transparency and audits on the reserves, with questions still asked if the reserves are collateralized at all. That, notwithstanding, it is a rather straightforward model and one aligned to regulatory, hence its popularity.

Unlike the algorithmic ones, which boast names such as the ever-renown TerraUSD (UST), these stablecoins depend on the change of supply within an economy, not on external-market transactions via smart contracts and other economic incentives. These systems usually dynamically change supply, often through mechanisms of minting and burning, coupled with another cryptocurrency. They offer decentralization and scalability but come with potentially substantial volatility and de-pegging risks, as UST's collapse in 2022 proved when billions disappeared.

Regulatory developments are increasingly influential for the stablecoin market. In general, regulators across all countries want to push tougher, continental-wide guidelines on aspects such as transparency, reserve requirements, and systemic risk construction when it comes to asset-backed coins, while algorithmic coins are going to be dealt with a harsher view due to the speculative nature and market instability that those types can cause.

The only space for stablecoins in the future can be striking the balance of innovations, transparency, and regulations that may safeguard both customers and the growth of the digital economy.

Thanks


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~ Nesaty

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Discussion of algorithmic vs. asset-backed stablecoins, risks, and regulatory developments is a great content.