This model was initially developed by BitShares but is also used by other stablecoins. The collateral is stored confidentially in a smart contract, so users do not rely on third parties. Because they are cryptocurrencies, stablecoins are based on widely used networks such as the Ethereum blockchain. Stablecoins aren\u2019t subject to the direct control of a central bank such as the U.S.<\/p>\n
<\/p>\n
As long as the collateral (or reserves) are available, coin holders know that they’ll be able to exchange a coin for $1. However, there’s a risk that the stablecoin issuer doesn’t actually have enough reserves. A stablecoin’s pegged value is what makes it useful within the world of crypto. But that’s possible only if coin holders can be assured they’ll be able to cash out their stablecoins. To ensure this can happen, stablecoin creators hold onto reserves of other currencies or assets. It\u2019s based on a blockchain, which is a decentralized online network.<\/p>\n
Those reserve assets drive the value of the stablecoin, so if the dollar goes up, so, too, does a dollar-pegged token. Holders of stablecoins should be able to redeem their tokens for the underlying asset when they choose. Algorithmic stablecoins are backed by other cryptocurrencies, but that backing is not exactly in terms of reserves https:\/\/www.xcritical.com\/<\/a> of that cryptocurrency. Simply put, the peg is determined by rules or software code linked to another cryptocurrency rather than holding the underlying cryptocurrency in a vault. Dai maintains its peg to the U.S dollar through collateralized loans of coins such as Ether, Bitcoin, and fiat-backed stablecoins such as USDC.<\/p>\n