Stable cryptocurrencies as a medium of exchange (part 2 of 4)

Crypto-collateralized
The second main model on the list is the crypto-collateralized stablecoin. This model has no fiat related parts, all the possible collaterals are on blockchain, such as Bitcoin, Ethereum or other cryptocurrencies. These collaterals are locked into a smart contract, so there is no third party involved, the structure is more decentralized. Furthermore, if the system designed well, it can be completely decentralized, making crypto-collateralized stablecoins more appealing to people than the fiat-collateralized cryptocurrencies.
On the other hand, the drawback of this model is the high volatility of the collateral. The system requires a substantially higher amount of collateral in order to make the lending/transaction bulletproof. As an example, if a person/organization (let's call it a user) needs 100 USD worth of crypto-USD, then the user needs to lock 150%-300% worth of ETH as a collateral in order to eliminate the obstacles of volatility. The smart contract, where the collateral is locked into, allows the users to access it by paying back the stablecoin debt or can be sold by the system if the collateral exchange rate falls below a certain point.
High collateral ratio is clearly an issue in the system, however, as the cryptocurrency ecosystem is getting more mature, several solutions appear on the horizon. Asset-backed tokens could be a good collateral option through their less volatile nature. There are already great progress on this field and predictions indicate that 10% of global GDP will be stored on blockchain by 2025 as tokenized assets.

Non-collateralized
The third model is the non-collateral stable coins or the so-called seigniorage shares. As its name says, this approach is not actually backed by anything other than confident belief that it will keep the promised value. Non-collateral stable coins scheme was invented by Robert Sams in 2014 where, its algorithm is controlling the supply of the coin, similar way as central banks do with fiat money.
As an example, take a non-collateral stable coin which pegged to 1USD. Given fixed supply, an increase in demand will cause the price to increase. Due to algorithmic setup, the system would issue more stable coin and sell it to the market resulting a price drop to the targeted 1USD.
On the other hand, when the demand decreasing, price also drops below the targeted 1USD. In most cases, the system is not able to buy back a sufficient amount of coins, therefore in order to reduce the circulating supply, the system issues shares or/and bonds with a par value of 1USD that are sold with discount in order to make it more appeal for users. In this case, bondholders are reducing stablecoins from the market, reducing supply, and raising the price.
As soon as the price rise above the targeted value, the system will favor the bondholders and shareholders first and pays them out (in a chronological order).
When the non-collateral stablecoin system is observed closely, it shows some similarities to the pyramid scheme. When the price is below the targeted level, the only healing serum is the promise of a future growth, which can be maintained by a higher market cap/demand. As soon as a continuous growth can't be maintained, the stablecoin and bondholders might be in a serious trouble. And here is why: As the price of the stablecoin falls, the system issues more bonds to raise the price. As more bonds the system issues, the longer the bond queue will be. As the bond queue is longer, the more time it needs to get paid (they are getting paid by chronological order, as it was mentioned above) and decreases the likelihood that each bond is paid. As the risk is higher, the bonds price must be lower to offset the additional risks. As the price of the bonds falls, more bonds need in order to shorten the supply of stablecoin. Users will lose faith in the stablecoin, stop using it and this will further push down the price and trigger a death spiral.

Asset based
Let’s start with assets. Real assets are tangible or intangible economic resources that can be converted into cash. Tangible assets can be gold, real estate, etc., while intangible assets are bonds, stocks or even bitcoin. Intangible assets are traded with its potential future worth, they can be much more valuable than tangible assets, therefore also more volatile. Since stability is most of the asset-backed cryptocurrencies aim, they are pegged to a tangible asset. This means that each token is worth exactly as much as the agreed unit of the physical asset, in other words the token price depends on the supply and demand fundamentals for the underlying asset.
Asset backed crypto currencies are differ a bit from the last three, because It is lacking of the characteristics of a currency.
Asset-backed tokens are a good store of value, an excellent solution for investors to protect their portfolio during volatile periods and it is also a feasible solution to protect wealth from inflation. You could buy 100 USD worth of goods for just 5.56 USD in 1915. That’s how much value the USD has lost in the past hundred of years. Assets such as gold has historically been an excellent hedge against inflation because its price tends to rise when the cost of living increases. Over the past 100 years investors have seen gold prices soar and the stock market plunge during high-inflation years.
Asset backed cryptocurrencies could be good as a medium of exchange, although it is not a natural approach. Money is a particular type of asset in an economy that people use to buy goods and services from other people or businesses. A medium of exchange is something that buyers will exchange with a seller when they want to purchase goods or services from the seller. While many things could be used as a medium of exchange in an economy, money is the most common and useful medium of exchange in our society.
A unit of account in economics is a nominal monetary unit of measure or currency used to represent the real value of any economic item; goods, services, assets, liabilities, income, expenses. Even though an asset-backed stable coin might have a lower volatility than other cryptocurrencies, it is still not good as a unit of account, which provides a common base for prices.