Cryptoasset Anti-Financial Crime Specialist (CCAS) Certification Practice Test

What is the main difference between asset-backed stablecoins and algorithmic stablecoins?

1. Pegging mechanism

2. Global supply

3. Issuer

4. Volatility

The correct answer is: Pegging mechanism

The main distinction between asset-backed stablecoins and algorithmic stablecoins lies in their pegging mechanism. Asset-backed stablecoins are typically tied to a specific reserve of assets, such as fiat currencies, commodities, or other financial instruments, which provide tangible backing and stability to their value. This means that for every stablecoin issued, there is an equivalent amount of the underlying asset held in reserve, ensuring that the coin maintains its value relative to that asset. On the other hand, algorithmic stablecoins do not rely on physical assets or reserves. Instead, they use algorithms and smart contracts to control the supply of the stablecoin in response to market demand. By expanding or contracting the supply of the stablecoin through mechanisms like minting new coins or burning existing ones, the algorithm aims to maintain the peg to a specific value, usually a fiat currency. Understanding these mechanisms is crucial for anyone involved in cryptoasset management and regulation, as they significantly influence the stability, risk profile, and use cases of different types of stablecoins.