The crypto industry is immensely volatile. This is due to both its infancy, and its influx of retail investors. While volatility can be favorable to some (such as day-traders), most people find it uncomfortable and worrisome. As a means of curbing this, developers created coins and tokens that are tied to certain values, allowing for steadiness and peace of mind. There are two main categories of coins that achieve this: stablecoins and elastic supply coins.
Both are designed to be significantly more predictable, and for this reason, they make for fantastic forms of collateral when getting crypto-backed loans. On the surface, they can even seem very similar to each other, but the technology and economic principles behind them are wildly different. So which is the better collateral: stablecoins, or elastic supply coins?
Stablecoins use reserves
Stablecoins, such as Tether, TrueUSD, and Dai, keep their assets at consistent prices by using reserves of fiat money. For every coin that is released or minted, the company has an equal amount of the fiat asset that the coin is pegged to. For instance, for every Dai that is minted, the company also has the same amount in US dollars.
This is a relatively simple means of keeping a coin tied to a certain asset, as there is always a 1:1 ratio of crypto and fiat. Stablecoins can also be pegged to other things such as precious metals or even stocks (although these are usually referred to as synthetics).
Stablecoins are popular in the crypto-lending industry because they are extremely consistent. This means that both the borrower and the lender can be confident that the worth of these coins will be unchanging. Plus, stablecoins have been around for some years now, and so they are relatively trusted and accepted by most lenders.
Elastic supply coins use algorithms
Elastic supply coins keep their prices stable in a very different way. Instead of having a reserve of fiat or physical assets, they maintain stability by algorithmically altering the circulating supply of coins to match the market cap. In cryptocurrency, market cap represents demand. Usually, when the market cap rises, the worth of each individual coin rises in price. However, elastic supply coins try to avoid this from happening, as their aim is to keep to a certain price (or price range). To achieve this, the circulating supply is programmed to change whenever the market cap changes.
For instance, when the market cap (or demand) increases, so does the circulating supply. This means that instead of each individual coin being worth more, the coins stay at relatively the same price as before, which happens by automatically distributing more coins to wallet holders. And when the market cap drops, the circulating supply does, too. This means that many coins get burned or destroyed, meaning that instead of the price of the coins dropping, they once again, stay the same.
Elastic supply coins are a relatively new technology in cryptocurrency, and they are still building traction, so they have less support from lenders and loan platforms. However, there are companies that still accept them as collateral. One positive about elastic supply coins is that their algorithmic behavior means that nobody has to worry about the company behind them running out of any reserve. This arguably makes them more robust than stablecoins as it means they can survive financial crises.
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