Centralized and Algorithmic Stablecoins

Centralized stablecoins

The most common variant of the issuer issuing cryptocurrency. The issuer is managed through a fund that holds a security reserve, which may consist of cash, treasury bills, securities and other assets. In order to prevent inconsistency of the actual size and composition of the fund with the declared one, the fund is periodically subjected to an independent audit. The leading companies in the production of stablecoins – Tether and Binance, regularly go through a similar audit procedure, and its results are posted on their official resources.

As a rule, providers of centralized stablecoins are large companies directly responsible for their release. Focusing on the size of the created reserve, issuers regulate the volume of coins in circulation.

Centralized stablecoins have a number of advantages: they are protected from volatility, have high liquidity, are ideal for creating exchange pairs, allow for quick mutual settlements and reliable storage of funds. At the same time, the centralization of the issuer may create problems if claims arise against it from supervisory financial regulators or the issuer itself begins to abuse manipulations with reporting and inefficiently use reserves. 

Algorithmic stablecoins

Ensuring the stability of the price of coins with the help of cryptocurrency reserves involves the introduction of special tools. The reason for such a special approach is the excessive volatility of digital assets. Often, such a tool is the decentralization of the management system and the use of an algorithm in its activities designed to ensure the required value of the asset. 

After the issue, the algorithmic stablecoin is supported by an increase in the size of reserves, that is, the value of the assets stored in it begins to exceed the value of all coins in circulation. 

According to this principle, for example, the issue of DAI from MakerDAO occurs. When issuing a coin backed by cryptocurrency, the user creates a pledge from his funds exceeding the value of the received DAI coins. Thus, with a sharp decline in the price of cryptocurrency, the security of issued tokens will remain. But the stability provided by this amount of collateral invariably affects the efficiency of capital as a whole. 

Stablecoins, the issue of which is not the prerogative of the organization and is available to any user, are usually provided with additional liquidity due to the introduction of a special crypto asset. The price of the token in this case directly depends on the actions of economic players. 

Development opportunities

To date, the popularity of algorithmic stablecoins is steadily falling due to a series of failed projects. 

The main players remain mainly centralized Tether and USD Coin. The authorities of different countries are trying to influence issuers by introducing additional measures to regulate their activities. This is caused by a number of concerns arising from financial departments related to the lack of transparency of reserves and the threat of converting stablecoins into fiat currencies. In the future, this may create some difficulties in using stable coins.