Commodity-backed and fiat-backed stablecoins

x There are stablecoins which are backed by commodities, such as precious metals (e.g. gold, silver, palladium) or oil (Petro). They are called Commodity-backed stablecoins (CBSs), created because much less inflated than other kinds of stablecoins. The value of a CBSs depends on the value of one or more underlying (backing) commodities (BC). They are redeemable for such value upon request by holders, according to a promise to pay, by unregulated individuals or regulated financial entities. The total outstanding of a BC is related to the circulating supply of the CBSs. CBSs’ holders can redeem the stablecoins at a given conversion rate. Once they did, they take possession of the underlying asset. The cost of maintaining the stability of the CBSs is related to storage and protection of the BC. The most notable examples of CBSs are Digix Gold Tokens (DGX), GCoin (XGC), Darico (DEC).

Some stablecoins are backed by fiat currencies and are called fiat-backed stablecoins (FBSs). FBSs’ value depends on the value of the backing fiat currency (BFC), held by a third-party regulated financial entity. The trust in the custodian of the BFC is crucial for the stability of FBSs price. They can be traded on exchanges and are redeemed by holders. The cost of maintaining stability is equal to the sum of the following costs: the cost of maintaining the backing reserve, the cost of legal compliance, maintaining licenses, auditors and the business infrastructure required by the regulator. FBSs are the most commonly used and the first type of backed stablecoins introduced on the market. As the name suggests, their value is linked to one or more fiat currencies. The most commonly used fiat currencies are the US dollar, the Euro and the Swiss franc, in a fixed ratio. The tether is realized off-chain, through regulated financial intermediaries which are legal depositaries of the BFC. As in the CBSs case, the amount of the BFC reflects the circulating supply of the FBS. The most notable examples of FBSs are: TrueUSD (TUSD), USD Tether (USDT) and Facebook’s Libra.

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