Following the Sperax whitepaper
, we see that when it comes to stablecoins, there are currently different types of solutions deployed in the crypto space, and each one of them has its own set of advantages and disadvantages.
The more widely adopted stablecoins today are fiat-backed stablecoins
. They maintain their peg by using fiat currency in a 1:1 ratio relationship as collateral. Even though they currently dominate the market, they are largely controlled by a single centralized entity, which makes them not as censorship-resistant as other cryptos. Additionally, they have to hold a 1:1 ratio of reserves backing their asset; this makes them relatively capital inefficient since their capital has to remain idle as collateral with very limited options when it comes to investing it. Examples of this type of stablecoins are USDT, USDC and BUSD.
On the other hand, there are also on-chain crypto-backed stablecoins
. This type of stablecoins maintain their peg by backing its emission with collateral of higher value. While this alternative is decentralized, it mostly relies on over-collateralization to mitigate the volatility of the crypto market. This inevitably makes them even more capital inefficient and thus impacts their scalability. The most widely adopted stablecoin that follows this approach is DAI.
Last but not least, there are algorithmic stablecoins
, maintain their peg by using market incentives through specialized algorithms. These types of currencies have the advantage of being scalable and decentralized. However, they might be subject to high-volatility periods and might also be difficult to bootstrap. UST is the most prominent example of this type of stablecoin.