A Simple Understanding to Metal-Collateralized Stablecoins with 2019 Complete Guide.

Part 5 of 7

Alyze Sam

Published in

Game of Life

6 min readMar 16, 2019

Enjoy shorts from my book while Kyle Rea of cREAtiveCastleStudios finishes the graphics!

If you haven’t read the first part of my book, you may “catch up” here.

Sources: Yoav Vilner, Forbes & Instagram

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-backed currency? An opposing argument suggests currency merely must have an agreed upon “value” to be successful. 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 only current noted Non-Collateralized approach is the Seigniorage Supply (Algorithmic) StableCoin Model.

Each Category Broken Down

I’ve separated three different types of asset backed coins, one non-collateralized and a group of hybrids, in hopes of a more simplistic understanding. As you can see in the photo.

Looking back, the first Asset-Collateralized StableCoin we discussed was Fiat- Collateralized. You can find that publication here.

Second, we covered another Asset-Collateralized StableCoin, Crypto- Collateralized StableCoin’s. That article is found here.

We then switched things up a bit and visited the only Non-Collateralized StableCoin Category, Seigniorage Supply (Algorithmic) StableCoin Model. Enjoy the description of the futuristic currency model here.

What’s next? An simple to understand category among a Asset-Collateralized group; Metal-Collateralized Stablecoins with a long list of promising projects.

Metal-Collateralized StablecoinsDefinition.

Metal-Collateralized StableCoins are cryptocurrency backed by commodities. Commodities are considered fungible assets with interchangeable features for convenient trading and transactions.

Advantages

Assets. Metal-Collateralized StableCoin holders hold cryptocurrency backed by “real-world” assets or tangible commodity.
Efficient. Some benefits of Cryptocurrency; Convenient, fast and secure conversions.
Liquidity. The tokenization of commodities brings greater availability of liquid assets to a market and facilitates a better price discovery.
Simple. Commodity structure is easily understood by average consumers.
Stable. Most Metal-Collateralized StableCoins are backed by commodities with long term stable market prices ensuring cryptocurrency prices won’t fluctuate wildly.

Disadvantages

Centralized. Centralized systems are prone to various vulnerabilities and risks. (Ie. single point of failure, bankruptcy of the central entity and moral hazards) Using a centralised structure negates a key principles of cryptocurrency; decentralization.
Requires Trust. Requires trust in a third party to hold sufficient fiat collateral. The central entity needs to be trusted for the fully-functioning of the system; this idea goes against the principle of cryptocurrencies; a trustless means of exchange.
External Audits Needed. For transparency of funds accounts must be verified. Auditing is required to make sure appropriate amount of collateral is being held, this can be a tedious and expensive process.

Example.

A commodities-backed StableCoin would represent a specific value of a commodity.

Example; 1 StableCoin Token = 1 gram of Gold.

The physical asset should be stored in a trusted third party’s vault. When one invests in a Metal-Collateralized StableCoin, the network mints a new token. Conversely, when liquidates the StableCoin, the network burns the token and collateral is received.

Criticisms.

Metal-Collateralized merely have value because it’s representation of another asset, leaving it centralized by nature. Crypto-enthusiasts state cryptocurrency was meant to be a trustless payment system.

Requiring a third party and audits is time intensive, costly, and leaves room for error. Intense regulation is key to transparency in these systems, which is why so many fail.

Fiat before 1970 was gold and commodity backed. Precious metals are viewed as a good store of value and continue to hold value even during recessions. Investors will still invest in gold and other precious metals while the market and every other asset depreciates.

“Stablecoins provide useful mediums of payment and have extended their use cases as decentralized finance (DeFi) continues to blossom with open protocol lending services, prediction markets, and more.” Yoav Vilner via Forbes, article found here.

End.

This concludes the small ‘short’ from an upcoming E-book. Stay tuned for more, and help a lady trying to serve the Women In Blockchain and The Tech News community out.

How?

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