Chapter 1: What Are Stablecoins?

Stablecoins are a category of digital currencies specifically designed to maintain a constant value relative to other assets, primarily fiat currencies like the USD. Additionally, some stablecoins are linked to tradable commodities, such as Tether Gold (XAUT) and Pax Gold (PAXG).

How many stablecoins are there? The number fluctuates based on the source, with CoinMarketCap listing 142 stablecoins, Live Coin Watch showing 310, and BitPay estimating around 200 globally as of October 2022. It can be said that there are roughly between 150 and 200 stablecoins in existence, although many are not actively utilized compared to the leading ones.

At present, the five most prominent stablecoins based on market capitalization are Tether (USDT), USD Coin (USDC), Binance USD (BUSD), Dai (DAI), and True USD (TUSD), collectively representing over 90% of the total stablecoin market cap.

Why are stablecoins significant? In the early days of cryptocurrency trading, options were limited; Bitcoin (BTC) was often paired with major digital assets like Litecoin (LTC) and XRP. When seeking to take profits or minimize losses, cashing out in USD was more challenging than it is now.

In a market characterized by extreme price volatility, not being able to quickly take profits or purchase Bitcoin at low points was a major concern. Stablecoins emerged to address these issues, offering crucial liquidity to the crypto market. They are especially beneficial for day traders, allowing for multiple trades and the creation of additional trading pairs, particularly for smaller cryptocurrencies.

The first stablecoin, BitUSD, was launched in July 2014 on the BitShares blockchain, followed by other early entrants like NuBits. However, many of these have since faded, while new alternatives continue to emerge as the crypto landscape evolves.

Chapter 2: Classifying Stablecoins

Stablecoins can generally be classified into two main categories: collateralized and algorithmic. Within these categories, further classifications include:

Section 2.1: Collateralized Stablecoins

1. Fiat-Backed Stablecoins:

   These are primarily backed 1:1 by cash or other tangible assets, often ensuring coverage by fiat currencies like USD or EUR.

2. Crypto-Backed Stablecoins:

   These utilize digital assets as collateral to stabilize their prices. A notable example is DAI, managed by MakerDAO, which operates on the Ethereum blockchain. DAI is generated by locking ETH and other approved tokens through smart contracts known as Collateralized Debt Positions (CDPs).

3. Commodity-Backed Stablecoins:

   These stablecoins are pegged to physical commodities, with gold being the most common backing. For instance, Pax Gold (PAXG) tokens are backed by one ounce of gold stored in secure vaults.

The first video titled "3 MAIN Types of Stablecoins Explained" provides a comprehensive overview of the different categories of stablecoins, emphasizing their unique characteristics and uses in the market.

Chapter 3: Stablecoins, CBDCs, and the Future

In recent times, many governments have considered launching Central Bank Digital Currencies (CBDCs), digital versions of traditional currency. Unlike stablecoins, CBDCs are issued and regulated by central banks, which distinguishes them fundamentally from cryptocurrencies.

As the crypto market grows, so does the need for alternatives to dominant stablecoins like Tether and USDC. There is potential for more decentralized options that can provide stability in times of regulatory uncertainty or market volatility.

In conclusion, while stablecoins play a vital role in the cryptocurrency ecosystem, the future may see the emergence of new types of stablecoins, particularly those linked to commodities like gold, which provide an additional layer of security and reliability for users.

Stay tuned for further insights on the evolving landscape of stablecoins and their implications for investors and the broader financial system.