A stablecoin describes a cryptocurrency that derives value from it being tied to an underlying currency, commodity or other financial assets.
This means that the value of the currency is permanently fixed to the underlying asset(s) and reacts to its price fluctuations. For example, Tether (USDT) is pegged to the value of the US Dollar, so the price of Tether should always be $1 regardless of dollar price changes against other cryptocurrencies.
Stablecoins must function as a store of value, medium of exchange and unit of account. They should also be fungible (interchangeable with another identical asset), spendable and divisible.
Stablecoins aim to solve the volatility problem associated with traditional cryptocurrencies, which are not backed by anything and are prone to price fluctuations that make them less suitable for everyday transactions.
Kinesis Gold (KAU) and Kinesis Silver (KAG) are backed by one gram of fully allocated fine gold and one ounce of fully allocated fine silver, respectively. They are classified as stablecoins because they are tied to physical bullion and their utility as money, spendable via the Kinesis card.
Different types of stablecoin
There are three different categories of stablecoin. These include:
- Reserve-backed stablecoins
- Algorithmic stablecoins
- Crypto-backed stablecoins
These stablecoins are often pegged to the value of an underlying fiat currency such as the Dollar (USD) or Euro (EUR). Instead of being backed by gold reserves in a central bank, they are backed 1:1 with currency reserves such as cash, cash equivalents, commercial paper and fiduciary deposits. Examples of a reserve-backed stablecoin include Tether (USDT) and USD Coin (USDC).
Algorithmic stablecoins are controlled by an algorithm that maintains the pegged price of the asset by increasing and decreasing the supply via minting new tokens or ‘destroying’ a specific amount of the supply.
Algorithmic stablecoins have shown a tendency for extreme volatility in recent years, undermining the price stability and liquidity of a stablecoin. A lack of physical reserves or minimal security in the case of extreme market volume revealed key issues with algorithmic stablecoins, as shown by the collapse of the Terra ecosystem.
These stablecoins use cryptocurrency as collateral instead of fiat money or other assets. Secured on the blockchain, asset reserves of crypto-backed stablecoins are trackable via a blockchain explorer or a ‘proof-of-reserve’ protocol to ensure the asset has sufficient reserve backing. Chainlink is a good example of this.
Kinesis Gold and Silver Stablecoins
While there are many stablecoins on the market, fiat-backed coins are not exempt from the principles of the fractional reserve banking system. For example, Tether (USDT) claims that one USDT is always backed by its equal dollar value despite the fact that there will always be more dollars ‘in existence’ than in circulation. This means fiat reserves can be much less stable and tangible than physical commodities such as gold or silver.
Unlike Tether, Kinesis Gold (KAU) and Silver (KAG) offer price stability by backing digital asset currencies with fully allocated and audited precious metals. These assets have maintained their value throughout history, and can now be used as everyday currency with the Kinesis card.