Stablecoins are a type of cryptocurrency designed to have low volatility, and so maintain a stable market price. Mechanisms for maintaining a stable price vary. Current designs include:
Off-chain collateralized stablecoins. These cryptocurrencies offer a tokenized claim on a portion of a centralized holding of fiat or precious resources. Examples include Tether and TrueUSD. While generally simple, easy to understand vehicles, these are often criticized by crypto maximalists for the centralized nature of the underlying asset, and the single point of failure represented by a storage facility such as a bank account or a Brinks vault.
On-chain collateralized stablecoins: These cryptocurrencies, such as MakerDao’s DAI, or Sweetbridge’s BRC token, are decentralized vehicles operating on-chain. Such stablecoins function only as a result of sizeable economic inefficiencies represented by the low lending ratios against the underlying cryptocurrencies used to collateralize such stablecoins.
Seigniorage shares: Seigniorage shares, named after an October 2014 Robert Sams article, describes a category of stablecoins with flexible money supplies governed by algorithms that programmatically buy and sell a stablecoin’s tokens in order to maintain the token price near the intended peg. While stablecoins of this genre are effectively untested in practice, their promise has aroused considerable interest,