2 PAYMENT METHOD PROFILES: STABLECOIN
Each type of stablecoin comes with its own risk and benefits. Algorithmic, or uncollateralized, stablecoins are dependent on smart contracts to match supply with user demand with few or no assets held in reserves. On-chain collateralized stablecoins are collateralized by crypto assets or other stablecoins which makes them highly volatile. These stablecoins aim to be over- collateralized and dependent on continuous valuation of the collateral. Off-chain collateralized stablecoins are more reliable given their pegging to a real-world asset, typically a fiat currency. Stabilization for this type of stablecoin is reliant on arbitrage where buying and selling the stablecoin aims to drive the market price toward 1:1 with the underlying asset. While a run on the stablecoin is always a possibility, transparency and a fully backed reserve gains trust from the users which lowers the risk for off-chain collateralized stablecoins. 739 Pros and Cons of Pegging Pros Cons Depending on the stability mechanism, less risk of volatility Little to no interest accrual passed on to user compared to un-pegged cryptocurrencies
Depegging risk 741
Increased security 740
Table 2.23
Accessing Stablecoins Given the inherently digital nature of stablecoins, there is no physical representation to be used as a payment method. Stablecoins are accessed using crypto wallets. Crypto wallets don’t store stablecoins themselves, rather they store a private key that proves ownerships of stablecoins that are on a distributed ledger. They can be categorized as either a hot or cold wallet. Hot wallets are accessible online and more convenient for frequent use, while cold wallets are offline exclusively and more secure. Given their ease of use, hot wallets will be the focus of this profile. Hot wallets are connected to the internet which bring convenience to making transactions but presents security concerns as well. Anyone with access to the wallet through a physical device like a computer or phone via the internet can sign transactions. 742
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