What is a Collateralized Stablecoin?
A collateralized stablecoin is a type of digital token that is pegged to the value of a stable asset, such as the US dollar, and is backed by a pool of other assets, such as other cryptocurrencies, that serve as collateral.
Think of it like this: Imagine you have a piggy bank that you filled with coins. Each coin represents a dollar. You can use those coins to buy things, but the value of the coins will not change, it will always be equal to one dollar. Now imagine that you have another piggy bank filled with other coins, let's say bitcoin, and you use those bitcoin coins to guarantee that the value of the piggy bank with dollar coins will always be one dollar. This is what a collateralized stablecoin is in the crypto space.
The function of a collateralized stablecoin is to provide a stable store of value in the crypto market, where the value of many cryptocurrencies can be highly volatile. By collateralizing the stablecoin with other assets, the creators of the stablecoin can ensure that its value remains stable and can be used for transactions and as a store of value, without the volatility of other cryptocurrencies.
A collateralized stablecoin is a type of cryptocurrency that is designed to maintain a stable value by being backed by a collateral asset, usually a fiat currency, a commodity or another cryptocurrency.
An analogy to understand this could be to think of a piggy bank. Imagine you have a piggy bank where you keep your allowance money, and you want to create a new type of piggy bank that always has the same amount of money, say $100, inside. To do this, you could put a $100 bill inside the piggy bank as collateral, and then issue a new type of coin that represents the value of that $100 bill.
Now, when someone wants to buy one of your stablecoin piggy bank coins, they can give you the equivalent value in other coins, such as Bitcoin or Ethereum, and you will give them one of your stablecoin piggy bank coins. This means that the price of the stablecoin will always be equal to the value of the collateral asset, and the person holding the stablecoin will be able to exchange it for the same value at any time.
Just like with a real piggy bank, if the value of the collateral asset changes, the value of the stablecoin will also change. For example, if the $100 bill in the piggy bank decreases in value, the value of the stablecoin will also decrease. Conversely, if the $100 bill increases in value, the value of the stablecoin will increase as well.
DAI: DAI is a decentralized stablecoin that is pegged to the value of the US dollar and is backed by a pool of crypto assets, such as Ethereum, that are held as collateral in smart contracts on the Ethereum blockchain.
USDC: USDC is a stablecoin issued by Circle and Coinbase, which is pegged to the value of the US dollar. Each USDC is backed by one US dollar held in reserve, which is held by regulated financial institutions.
sUSD: sUSD is a decentralized stablecoin that is pegged to the value of the US dollar and is backed by a pool of crypto assets, such as Ethereum, that are held as collateral in smart contracts on the Ethereum blockchain.