People sometimes search for security and stability when managing their assets. Some assets offer the possibility of appreciation, but they can be volatile, offering a risk of depreciation as well. Fiat currency of nations with relatively stable economies is often viewed as a “safe” asset. But throughout history, stable currencies have sometimes become unstable. Some people view the central banks that control currencies with quite a bit of skepticism. Even the most stable currencies, arguably, entail risks that are not, in the view of some people, priced in to asset costs and yields for “parking” those assets. So for people with this outlook, a stablecoin that is reliable worth one dollar or one Euro is not really that stable at all.
So what can people do to provide a stable hedge against a downturn if not even fiat assets from the most stable economies are reliable in their opinion? They could diversify into commodities. But commodities investments can be fraught and a bit of a hassle with high transaction fees. Fortunately some stablecoins offer a relatively simple solution to the conundrum.
Some stablecoins are backed by commodities. For instance, you can get stablecoins backed by gold. This is the most common form of commodity-backed stablecoin. To the extent that the value of gold in real terms is stable, this provides a safe haven with a secure future value. Whatever crazy things might happen in fiat currency — the value of real goods you can trade gold for is perhaps more important.
Each gold-backed stablecoin represents a specific amount of gold — for example, 1 token is worth one gram of gold. The physical gold that backs the tokens is often stored in the vault of a trusted third party. While commodity-backed stablecoins are not as popular as fiat-backed stablecoins, they provide a viable alternative for those looking to transact in tokens backed by real, tangible value via precious metals.
Benefits • It is guaranteed by real assets: the holders of the stablecoin own something connected to a tangible and guaranteed asset with real value.
• Stability: The price of some commodities is relatively stable, and would represent a good underlying asset for a stablecoin.
Disadvantages • Centralized: Third parties such as suppliers, custodians and the company itself are required to ensure the full functioning of the system. This entails risks.
Learn more about Stablecoins in our article series: What are stablecoins? Stablecoins collateralized by fiat currency Stablecoins collateralized by cryptocurrency Stablecoins collateralized by commodities Algorithmic stablecoins
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