Decentralized Stablecoin

November 21, 2023 - Around 2 mins mins to read

Understanding Decentralized Stablecoin

A decentralized stablecoin is a digital asset created on the blockchain with the goal of maintaining a fixed price peg, usually at $1. This eliminates the impact of market fluctuations and provides a secure and stable option for holders.

Stablecoins act as intermediaries between holding assets and converting them into fiat currency, or as a more efficient method for cross-border payments. Centralized stablecoins are typically backed by off-chain fiat collateral and are directly linked to third-party custodians like banks. Examples of centralized stablecoins include Tether (USDT) and Coinbase’s USD Coin (USDC). However, these stablecoins require trust in the third party’s possession of the corresponding dollars.

On the other hand, decentralized stablecoins are fully transparent and non-custodial, with minimal third-party control. All collateral backing is visible on a publicly verified blockchain, enhancing trust and security by eliminating reliance on a single entity. Decentralized stablecoins can be categorized into two types: crypto-collateralized and algorithmic.

Crypto-collateralized stablecoins allow for manual adjustments in supply through minting or burning tokens as needed. Algorithmic stablecoins, on the other hand, utilize smart contracts or algorithmic market operations controllers (AMOs) to automatically manage the supply.

Author: Travis Moore, CTO of Frax

Bio: Travis Moore is an angel investor, programmer, entrepreneur, and the CTO of Frax, the world’s first fractional algorithmic stablecoin that is partially backed by collateral and stabilized algorithmically. Frax is open-source and permissionless, bringing a truly trustless, scalable, and stable asset to the future of decentralized finance. Moore is also co-founder of the blockchain-based knowledge base, Everipedia. Moore has a triple-major from UCLA in Neuroscience, Biochemistry, and Molecular, Cell, & Developmental Biology. His passions are artificial intelligence and blockchain technology, which he believes are the two industries that will impact the world the most in the coming decade.