Types of stablecoins
Stable cryptocurrencies can be divided into two types: some are tied to fiat currencies (issued by states), and others are paired with other assets, such as gold, stocks, and other cryptocurrencies.
There are also others, with parity with other types of assets. For example PAX Gold, whose token remains at parity with the ounce of gold.
The DAI model
While maintaining its one-to-one parity with the US currency, DAI is not backed by dollars but by another cryptocurrency: when someone wants to create a DAI, they have to leave another token as collateral, generally ETH.
DAI works with the ERC 20 protocol, from Ethereum, which allows the creation of fungible (that is, interchangeable) tokens.
This allows all the tokens to be the same and, at the same time, that any wallet connected to the Ethereum network is compatible with DAI. Basically, if a wallet can receive ETH, then also DAI.
DAI works with several mechanisms that compensate its supply and demand so that it is always worth the same: one US dollar.
This happens through a smart contract that runs on the Ethereum blockchain, which allows it to work in an automatic and decentralized way.
In the event of an accentuated market instability, the smart contract activates a mechanism called feedback.
When the price falls below a dollar, a rate is created that rewards the retainer of DAI and discourages the creation of new ones. On the contrary, when the price rises, the creation of new DAIs is incentivized through a decrease in the rate.
The USDC model
In the USD Coin model, for every USDC issued there is a dollar in a reserve bank account, and the proposal is that this parity will always be maintained.
USDC works with Ethereum's ERC 20 protocol, which allows the creation of fungible (i.e., tradable) tokens.
This allows all the tokens to be the same and, at the same time, that any wallet connected to the Ethereum network is USDC compatible. Basically, if a wallet can receive ETH, then also USDC.
This token, unlike DAI, requires confidence that the number of dollars in the reserve corresponds to that of circulating tokens.
To sustain that confidence, the Center consortium (Coinbase and Circle, the companies that promote USDC) hired external auditors who are in charge of verifying that the amounts of the token match the reserves.
With the support of these consortia, USDC provides a mechanism that allows to exchange the token directly for dollars that are transferred to the user's account.
