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How Safe Are Stablecoins Part 3 – Crypto & Commodity Collateralized Coins
The question we aim to answer is how safe and stable are stablecoins? We will be covering crypto and commodity-backed stablecoins in this episode. Are stablecoins backed by cryptocurrencies or gold any better than fiat or algorithmic stablecoins?
Well, the answer depends on what you want. If you are looking for something pegged to the dollar, you may have a better time with fiat-backed stablecoins. If you want to stay in the realm of crypto but you want a coin that’s more stable to use for buying things, a crypto collateralized coin like DAI may be a good option for you. If you want something backed by a commodity and simply want exposure in crypto to real-world assets like gold, you can invest in something like PAXG or XAUT.
Like fiat collateralized stablecoins, these coins are supposed to be backed 1:1 but instead of fiat it’s by various cryptocurrencies. Sometimes, it’s just one cryptocurrency and other times it’s a pool of them. It can either be pegged to $1 still like DAI or be pegged to something else entirely like wrapped Bitcoin on Ethereum.
The main advantage of crypto-collateralized stablecoins is that they offer you exposure outside of just fiat and let you stay more within the realm of crypto. Beyond that, they also offer more options for decentralization as they may not require an entity like Tether to back their currency and can utilize a DAO like DAI.
More decentralization means less ability to control the funds, so they are more vulnerable to hacks. Being crypto backed means, it may also not be as reliable in a crypto bear market.
Commodity-collateralized stablecoins are those that are backed by physical good commodities like gold that are held by a central entity. Like a fiat backed stablecoin, they are supposed to store the commodity and back their cryptocurrency at a 1:1 ratio. While there are some examples outside gold and it’s possible to tokenize anything, we will mainly talk about gold examples to keep things simple.
https://coinmarketcap.com/alexandria/glossary/asset-backed-tokens - Coinmarket also gives an explanation of this. They can also be referred to as asset-backed tokens to simplify the term.
You can find some gold examples and explanations on this from Coinmarketcap too: https://coinmarketcap.com/alexandria/glossary/gold-backed-cryptocurrency.
Gain exposure to more stable assets while staying in the crypto realm and maintain the ability to buy cheap fractional physical assets and hold them in a decentralized way.
You still need to trust a centralized entity to not mismanage or lie about the backing of their commodity-backed assets. You still need to rely on the underlying asset so it may not necessarily be stable in comparison to other stablecoins, but it will still ideally accurately reflect the value of that asset. There aren’t very many reliable projects that tokenize real-world assets that I would be confident enough to use instead of buying the real-world asset or just holding cryptocurrency like Bitcoin. They also tend to have low liquidity and aren’t trading on many exchanges.
Do you hold any crypto collateralized or commodity-backed stablecoins? Do you trust that they are backed 100%? Do you trust any of these entities? Let me know what you think about this in the comments below and don’t forget to subscribe!
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For some examples of each check out my blogs:
*Disclaimer: This is not financial advice and is purely for entertainment purposes. What you see, hear, or read is my personal opinion, and any statements made are based on my views and should not be misconstrued as fact. My crypto portfolio may or may not be simulated*
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