Stablecoins Explained: Bridging Traditional Finance and Blockchain
In the fast-evolving world of cryptocurrencies, stablecoins have emerged as a reliable alternative in the Web3 AI landscape. They are designed to maintain a steady value by pegging to stable assets like fiat currencies or commodities, offering the best of both worlds: the innovation of Web3 AI, blockchain technology and the consistency of TradFi. Whether used for seamless cross-border payments, hedging against inflation or other DeFi activities, stablecoins have become essential in reshaping the global financial landscape and driving the adoption of digital currencies.
Types of Stablecoins
Stablecoins maintain their value through various mechanisms, each suited to different use cases:
Fiat-Pegged Stablecoins:
These stablecoins are backed 1:1 by reserves in fiat currencies like the USD or EUR. Examples include Tether (USDT) and USD Coin (USDC). Their stability derives from the collateral held in equivalent fiat reserves.
Commodity-Pegged Stablecoins:
These stablecoins are backed by tangible assets like gold or silver, allowing users to gain exposure to commodities without owning them directly. Examples include PAX Gold (PAXG) and Tether Gold (XAUT), where reserves represent physical gold stored securely.
Crypto-Backed Stablecoins:
Backed by cryptocurrencies rather than fiat, these stablecoins use overcollateralised reserves to counterbalance the volatility of their underlying assets. Dai (DAI), issued by the MakerDAO protocol, exemplifies this through its smart contract system where users deposit crypto collateral to mint stablecoins.
US Treasury-Backed Stablecoins:
These stablecoins, like Ondo’s USDY or Hashnote’s USYC, are directly supported by USTreasury securities and repurchase agreements, presenting them as tokenised money market funds. Their yield-generating feature makes them attractive to passive investors seeking regulatory-compliant, stable returns in the Web3 AI space.
Algorithmic Stablecoins:
Algorithmic stablecoins such as FRAX and AMPL rely on programmed mechanisms to stabilise value by dynamically adjusting supply and demand. However, this model carries inherent risks, as demonstrated by the collapse of TerraUSD (UST) in 2022, highlighting the challenges of sustaining stability without direct collateral.
Stablecoins are more than a bridge between traditional finance and blockchain; they catalyse financial innovation. Their ability to drive global accessibility, unlock new economic models and integrate into both decentralised and institutional systems positions them as a key driver of financial transformation with Web3 AI technology. As regulations mature and adoption grows, stablecoins are set to redefine how value moves in a digital-first world.
*Disclaimer: The information provided on this blog does not constitute investment advice, financial advice, trading advice, or any other form of professional advice. aelf makes no guarantees or warranties about the accuracy, completeness, or timeliness of the information on this blog. You should not make any investment decisions based solely on the information provided on this blog. You should always consult with a qualified financial or legal advisor before making any investment decisions.
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aelf Ventures is the investment arm of aelf, a high-performance Layer 1 AI blockchain platform that offers builders and users advanced AI functionalities and cutting-edge infrastructure. With a dedicated fund of $50 million, aelf Ventures is focused on empowering Layer 1 blockchain projects and various aspects of the Web3 ecosystem, such as DeFi, GameFi, NFT, and those looking to make the transition from Web2 to Web3.
Till date, aelf Ventures has invested in projects such Crystal Fun and Confiction Labs (pka. Mythic Protocol), and is actively incubating promising ventures within the ecosystem such as Portkey, eBridge, Forest NFT Marketplace, AwakenSwap, eWell, and BeanGoTown.
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