Why they are important for the blockchain ecosystem


The Relevance of Stablecoins

Stablecoins are cryptocurrencies whose price is pegged to the value of a FIAT currency or any other asset. The growth of defi has led to a huge demand for cryptocurrencies that guarantee price stability. Over the years, many different types of stablecoins have emerged with different price stability mechanisms.

Different Types Have Emerged

The first type of stablecoins to go mainstream have been Fiat-backed stablecoins such as USDT. They issued stable token pegged to the USD against a FIAT deposit. However, FIAT backing requires a centralized banking structure. The resulting level of centralization and for some projects, lack of transparency led to the emergence of on-chain crypto-backed stablecoins such as Dai from MakerDAO. Dai is over-collateralized with different digital assets such as ETH in its vaults. This leads to a high stability but low capital efficiency. This inefficiency left room for algorithmic stablecoins to gain momentum. The most prominent algorithmic stablecoin has become UST. Its peg was achieved through a mint and burn algorithm in a duo-token model as its price stability mechanism. However, its recent crash has shown that this mechanism fails to create price stability under adversarial conditions.

More about the different types of stablecoins can be found under the following links:

Education & Transparency is Needed

The recent crash of UST has shed a light on the risks associated with algorithmic stablecoins. Many retail investors, DAOs and protocols have suffered from significant losses and the burst of UST dragged the whole crypto market into heavy losses. The event has also shown that the severe effect for many investors could have been prevented with better education on the risks associated with UST. Stablecoins.wtf has been developed to create transparency and comparability between all different stablecoins and to educate about the risks associated with them.