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A Guide to Stablecoins on BlockFi

Published, 12 May, 2022

Stablecoins are digital currencies backed or pegged to a “stable” reserve asset like the US dollar or gold. By design, they aim to minimize typical cryptocurrency volatility by providing consistent value. However, there are differences in the types of stablecoins and it is important to understand the “tokenomics” of how individual stablecoins operate and hold their value. There is a spectrum of stability and it is worth noting a few things, such as how a stablecoin is collateralized, what type of asset it is collateralized with, and how it maintains its target or “pegged” price.

Types of Stablecoins

There are four common types of stablecoins:

Fiat-backed: Such as GUSD, USDC, BUSD, and USDP (PAX) - are the most widely used and interchangeable with USD on a 1-to-1 basis. For every stablecoin in circulation, the issuer of the coin holds $1 USD or cash equivalents in reserve.
Commodity-backed: Stablecoins that are collateralized by physical assets, such as real estate or gold, like PAXG. The value of these stablecoins rise and fall with the value of that corresponding asset.
Hybrids: Some stablecoins, such as USDT, are collateralized by a mix of fiat and non-fiat assets. According to their 2021 independent account report, USDT had ~83% in cash and cash equivalents in their reserves, with other collateral which includes digital tokens, secured loans, corporate bonds, and precious metals.
Algorithmic stablecoins - These types of stablecoins are not collateralized by fiat, commodity, or physical assets. They are not hard-pegged to the value of its fiat counterpart, but rather, the target price is intended to come from an algorithm which manages the supply of the stablecoin. Algorithmic stablecoins manage circulation by increasing supply when prices rise above the tracked fiat value or decreasing supply when prices fall below the tracked fiat currency. It is important to note that not all algorithmic stablecoins are the same when it comes to how or if they are collateralized. Some of the variances can be categorized as:
- Crypto-backed algorithmic: These types of stablecoins, like DAI, are collateralized by cryptoassets. For example, DAI is collateralized by 18 different types of assets and isn’t “hard-pegged” to the US dollar, meaning it can fluctuate slightly above or below the 1:1 ratio to USD. DAI has also indicated that it manages its value by being overcollateralized at 164% as of May 12, 2022.
- Smart-contract algorithmic: Stablecoins like UST are purely algorithmic, can be uncollateralized or undercollateralized, and may not hold reserves. In the case of UST, its target price is “backed” by its “sister currency” LUNA.

Another consideration to make is where a stablecoin is domiciled as this may affect if and how it is regulated.

Stablecoins on BlockFi

As of May 2022, BlockFi offers the ability to buy, sell, and hold seven stablecoins:

Fiat-backed: USDC, GUSD, USDP (PAX), and BUSD – approximately 92% of the stablecoin volume held on BlockFi.
Commodity-backed: PAXG – approximately 1% of the stablecoin volume held on BlockFi.
Hybrid: USDT accounts for approximately 6% of fiat-collateralized stablecoins on BlockFi.
Crypto-backed: DAI – approximately 1% of the stablecoin volume held on BlockFi.

Trading and withdrawals

There are a few specific things to know about how trading and withdrawing work on BlockFi for each stablecoin.

Specifically when it comes to trading, there are differences to consider in interchangeability vs. market price with stablecoins. Not all stablecoins are interchangeable (1:1) with each other on the BlockFi trading platform.

As long as they maintain their pegged value to USD, fiat-backed stablecoins are interchangeable on a 1:1 basis, such as USDC, GUSD, BUSD, and USDP (PAX). These trade at a fixed price of $1 between them and can be withdrawn directly to your bank account with BlockFi selling your stablecoin and sending USD to your requested account

Commodity-backed and algorithmic stablecoins trade at market price on BlockFi and are not interchangeable on a 1:1 basis with other stablecoin assets. For example, DAI or PAXG can only be withdrawn on the blockchain or would need to be traded to a fiat-backed stablecoin before being able to be withdrawn.

BlockFi Stablecoin Trading & Withdrawals

While there may be volatility in particular cryptoassets, cryptocurrencies and stablecoins trade at market prices and BlockFi is not directly exposed to particular price fluctuations as part of the operations of our products and services.

As a reminder, the @BlockFiSupport team is always available to answer your questions. Please reach out to us: https://blockfi.com/contact/

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