Table Of Contents
- Collateralized stablecoins
- Algorithmic stablecoins
- Non-collateralized stablecoins
In the dynamic world of cryptocurrencies, stablecoins have emerged to diminish volatilities, maintaining a stable value relative to a reference asset. But what exactly are AI-powered stablecoins, and what role do they play in the crypto ecosystem?
In this blog post, we explore the role of AI-based stablecoins in the ecosystem and how they contribute to the improvement of cryptocurrency and coin development. Before exploring AI-powered stable coins, let’s have a quick look at stablecoins and their types.
Stablecoins are cryptocurrencies whose value is pegged or tied to another currency, commodity, or financial instrument. A stablecoin is a cryptocurrency collateralized by the value of an underlying asset. They can also be pegged to other assets, including metals like gold or other cryptocurrencies.
Stablecoins provide various use cases and purposes, making them a separate value in the cryptocurrency industry. They aim to provide an alternative to the high volatility of popular cryptocurrencies. Here’s a peek at what you can actually do with these stablecoins.
- Stabilize the value of digital currency
- Convenient trading and saving
- Cost-effective money transfers
- International money transfers
Stablecoins can be categorized into the following types:
1. Collateralized stablecoins
Collateralized stablecoins are coins whose values are backed by specific collaterals. They can be further classified as:
- Fiat-backed stablecoins
- Asset-backed stablecoins
- Crypto-backed stablecoins
2. Algorithmic stablecoins
Algorithmic stablecoins might keep reserve assets. Their key distinction lies in their approach to maintaining a stablecoin’s price by managing its supply through a computer program running a predefined formula.
3. Non-collateralized stablecoins
Non-collateralized are similar to algorithmically-backed stablecoins, but they do not have any reserves in smart contracts. Instead, they rely on complex processes meant to adjust the circulating supply of their coins in response to supply and demand.
Non-collateralized stablecoins destroy and inflate supply on-chain to maintain their peg. They don’t rely on external collateral, as they self-collateralize during minting.
AI-powered stablecoins are a type of cryptocurrency that uses artificial intelligence (AI) to maintain its peg to an underlying asset, such as a fiat currency or commodities. This is done using AI algorithms to monitor market conditions and automatically adjust the supply of stablecoins in circulation.
Planning on Investing in an AI-powered Stablecoin?
For the smoother workflow of AI-based stablecoins, they function by implementing this duo strategy:
Algorithmic Stabilization: AI algorithms regularly monitor how the stablecoin’s price is compared to the actual entity it’s tied to. If the stablecoin is going too high or low, these algorithms act accordingly. They adjust the number of stablecoins available to ensure the price returns to where it should be.
Reserve Management: These stablecoins have a backup strategy called the reserve. It’s kind of like a safety net made up of assets that are there to have the stablecoin’s back and help keep its value steady. AI algorithms present here play the role of managers. They automatically decide if the reserve needs to bulk up or slim down based on what’s happening in the market and how the stablecoin is holding up.
The integration of artificial intelligence contributes to coin development, adding more benefits to stablecoins.
Greater stability: AI algorithms can react to market changes more quickly and efficiently than humans, which can help to maintain the stablecoin’s peg to the underlying asset.
Improved transparency: The algorithms can be tested and reviewed to ensure they operate correctly. This can improve the transparency of the stablecoin system.
Dynamic adaptation: The algorithm enables stablecoins to dynamically adjust their pegs and adapt to market conditions, economic indicators, and other relevant factors.
Risk reduction: It reduces the risk of price fluctuations by implementing advanced risk management strategies to ensure the stablecoin remains stable.
As stablecoins must be backed up by fiat currency or crypto assets to support their value, a fiat-backed stablecoin is backed by a fiat currency, and the government revenue ties it. A crypto-backed stablecoin is backed by a suitable crypto collateral. Considering this, there’s a risk if stablecoins rely too much on regular money or crypto. Regular money loses its value over time, and crypto is a market that has ups and downs.
What if an option that reduces these risks helps keep the value steady? In that case, AI-powered stablecoins provide the solution, implementing the algorithms and strategies that stabilize the stablecoin’s value, adjusting according to the market trends instantly with the help of artificial intelligence.
Suppose there is a situation where everyone starts selling their stablecoins because the value drops a bit. In that case, the AI-powered stable coins increase their transaction fees to settle everything in the market, and they charge lower fees to encourage transactions when everything is going well. Despite panicking about the daily fluctuations in the market, you can go for AI-based stablecoins that make smart decisions based on loads of data.
In cryptocurrency development, there is enormous space for AI-powered stablecoins, and here we can list down some of the popular AI-based stablecoins.
- DAI – MakerDAO is a decentralized autonomous organization that issues the DAI stablecoin. It uses AI to analyze the collateral that is backing DAI.
- FRAX – It is a fractional-algorithmic stablecoin that is pegged to the US dollar. A reserve of Ether and FRAX tokens backs it.
- SingularityNET (AGIX) – It is an AI-powered stablecoin with a decentralized platform at the intersection of AI and blockchain, facilitating the development, sharing, and monetization of AI services globally. AGIX serves as the native cryptocurrency for transactions within the SingularityNET ecosystem.
Having seen the integration of artificial intelligence into the stablecoin development, we are moving more towards the stability and adaptability of digital currencies in the cryptocurrency market. As we look to the future, it’s clear that the combination of AI and stablecoins is set to shape a more reliable and transparent ecosystem.
Despite their potential benefits, AI-powered stablecoins face challenges, including complexity, manipulation, and risk of bias. To overcome the challenges and step up into AI stablecoins with your investment, Blockchain App Factory provides you with the best AI stablecoin solutions to mark your presence in the industry. With our experts having more than seven years of experience in blockchain and 150 plus experts, get in touch with our team, which can tailor your business needs with our exceptional stablecoin development services.