A Simple Understanding to Hybrid Stablecoins with 2019 Complete Guide.

2019 Complete StableCoin Guide

Part 6 of 7

StableCoin Definition.

Simply stated, a StableCoin is a cryptocurrency pegged to another asset. Or, a global digital currency solely unrelated to a central entity. StableCoins make for practical usage of cryptocurrencies by allowing for secure, convenient transactions without the high volatility traditional cryptocurrencies hold.

Now let’s move on….

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

Define Asset-Collateralized StableCoins.

The socially agreed upon currency most countries use is termed ‘fiat’, which literally means ‘something that was created without effort.” Until 1971 world currencies were backed by gold. Before printed money; diamonds, silver, gold, land, estate and other goods were used as means for barter. Shifting from an asset backed currency to the current fiat system left centralized banks, governments, financial technologists, private entities, and economic experts with the concept of Asset-Collateralized StableCoins. These specific StableCoins’ purpose is to tokenize stable assets on a blockchain serving as a digital currency for means of speedy, secure and stable daily transactions. Stablecoins in this category should be guaranteed to exchange 1 : 1 StableCoin for its underlying asset.

Define Non-Collateralized StableCoins.

One argument states, fiat is not backed by any tangible asset, therefore; why should cryptocurrency only have value as an Asset-Collateralized Coin? Opposing argument suggests currency must have some agreed upon “value”. Non-Collateralized Stablecoins were created as a medium. This category of digital currency is not backed by any real-world or cryptocurrency asset; but instead, maintains value by its users expectations of maintaining a certain value. The main Non-Collateralized approach is the Seigniorage Supply (Algorithmic) StableCoin Model.

Each Category Broken Down

I’ve separated StableCoins into three different categories. three are Asset-Collateralized, one is Non-Collateralized and the remaining group is a Hybrid category. This is in hopes of a more simplistic understanding for us all. *see photo*

Hybrid StableCoin Models

Definition

A Hybrid StableCoin is two or more of the crypto categories, (Fiat, Crypto, or Metal Collateralized and Algorithmic StableCoin Model) applied to one token. Hybrid StableCoin Models hold value partly being both asset and algorithmic modeled.

Advantages

  • Mixed. Has all the advantages of each category
  • Diverse. Meets a lot of needs for different users.

Disadvantages

  • Difficult to Understand. Can be very confusing because it crosses different categories of backed assets
  • Regulations. Laws and regulations often limit these projects.

Examples

While algorithmically backed stablecoins are superior in terms of the lack of a centralized fail points, on the consumer side they are initially inferior to fiat-backed. On day 0, a redeemable fiat-backed stablecoin is much more trusted than an algorithmic non-redeemable stablecoin. While some groups have considered essentially buying their way out of this by distributing profits to the users, most mechanisms for distributing the economic gains stemming from an uncollateralized system will motivate both economically suboptimal and speculative behavior that will ultimately destabilize the system. If profits are distributed to wallets or token holders demand will be artificially inflated leading to a pattern of boom and bust cycles. Maintaining accurate metrics is crucial to most active reserve management approaches and creating systems that motivate the creation of excess volume, demand, or wallets will both increase system volatility but also skew the decision making process of the operators. As many proposed systems rely on on-chain governance, this is a particularly salient risk. Combining the two presents the best route forward.Sam Trautwein perfectly stated in his article for StableCoin Carbon’s release.

Criticisms.

Sam Kazemian, Co-Founder and President of Everipedia claims, “Stablecoins, as an asset class, are the next big thing in crypto and will lead to a new bull market in the next 6 — 18 months”. Sam continued on and stated a Hybrid StableCoin, was the most promising.

End

Tell me what you think.

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  • What would you add?
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