Algorithmic, fiat-backed or crypto-backed: What’s the best stablecoin type?
TerraUSD (UST) flipping BinanceUSD (BUSD) for the third spot in the market capitalization list didn’t last long. The once-mighty stablecoin that powers the entire Terra ecosystem finds itself reduced to “Terra is more than UST” tweets. While no one knows for sure if LUNA can stage a comeback, UST will certainly go down as one of the algorithmic stablecoins that went kaput in the same fashion as Basis Cash — which Terra creator Do Kwon was allegedly a part of — and Mark Cuban-backed Iron Finance.
UST’s failure begs the question if algorithmic stablecoins are truly just doomed to fail? And, is fiat-backed or crypto-backed stablecoin the only way investors can find the most “stable” way to shield themselves from the crypto market’s volatility?
By now, most are aware of the types of stablecoins such as fiat-backed stablecoins, crypto-collateralized stablecoins and algorithmic stablecoins. There are also other types of stablecoins like commodity-backed and seigniorage, but the three mentioned above are the most popular.
Users have their reasons for preferring one kind of stablecoin over another. For instance, some prefer to use algo stablecoins because of their decentralized narrative. Others would go for fiat-backed cryptocurrencies like Tether (USDT) and USD Coin (USDC), even though they are centralized due to the private firms that maintain the equivalent fiat reserves of each issued token. Still, an advantage of fiat-backed coins is there is an actual asset backing the coin.
The stability of its peg will remain as long as there are verifiable holdings of such fiat reserves. Still, the most obvious risk here is a bank run scenario, which for Tether might be troublesome considering how it is largely exposed to commercial
Read more on cointelegraph.com
