Stablecoins

A stablecoin is a type of fungible token that is backed by assets of value outside of the blockchain in which is issued. Typically, the stablecoin's issuer holds backing assets representing the equivalent value of the tokens issued on the XRP ledger. A stablecoin issuer is sometimes called a gateway, because currency can move into and out of the XRP Ledger through their service. If the assets that back a token use the same amounts and denomination as the tokens in the ledger, that token can be considered a "stablecoin" because—in theory—the exchange rate between that token and its off-ledger representation should be stable at 1:1.

A stablecoin issuer should offer deposits and withdrawals to exchange the tokens for the actual currency or asset in the world outside the XRP Ledger.

In practice, the XRP Ledger is a computer system that cannot enforce any rules outside of itself, so stablecoins depend on their issuer's integrity. If you can't count on the stablecoin's issuer to redeem your tokens for the real thing on demand, then you shouldn't expect the stablecoin to hold its value. As a user, you should be mindful of who's issuing the tokens: are they reliable, lawful, and solvent? If not, it's probably best not to hold those tokens.

There are five common types of currency token traded on the XRP Ledger.

Fiat Backed

Fiat-backed stablecoins are based on a government-issued currency such as the Euro, US Dollar, Japanese Yen, and so on. They are backed at an exchange rate of 1:1. It is a simple, stable option whose pricing structures exactly match what users are familiar with, but it has many of the same downsides of the underlying fiat currency including being tied to specific national interests and subject to inflation. In the strictest definition of a "stablecoin", only 100% fiat-backed tokens qualify.

Crypto Backed

Crypto-backed stablecoins are similar to fiat-backed stablecoins, but using cryptocurrency as collateral. They are more volatile, like their underlying cryptocurrency, and may have limitations or costs associating with withdrawing or depositing based on the underlying cryptocurrency's network and its properties. Crypto-backed stablecoins can be backed with publicly-viewable wallets, so you don't need auditors to confirm the value of the backing assets, but the backing wallets require the highest cybersecurity standards to protect them against malicious actors trying to steal the funds.

Commodity Backed

Commodity-backed stablecoins are based on a fungible asset such as gold, real estate, oil, or electricity. Commodities are relatively stable and liquid, but are centralized and require regular audits to verify their value.

Financial Instrument Backed

A stablecoin can be backed by financial instruments such as bonds or equity shares.

Non-collateralized

A non-collateralized token relies on algorithm-generated smart contracts to supply or sell tokens, similar to a central bank's approach to printing and destroying currency. No collateral is required to mint tokens. Value is controlled by supply and demand through algorithms that stabilize the price. Non-collateralized tokens are typically not considered stablecoins, due to their volatility.