What are Fractional Stablecoins?
The meaning of Fractional Stablecoins are a type of cryptocurrency that is pegged to the value of an underlying asset, usually a fiat currency like the US dollar. Unlike conventional stablecoins, fractional stablecoins offer users the ability to hold and transact with fractions (or decimal points) of a coin—e.g., one-fourth or one-hundredth of a whole coin. This makes them ideal for micropayments and other uses that require smaller amounts than what can be offered by larger, more established cryptocurrencies. Additionally, fractional stablecoins are often more cost effective to use than traditional payment methods due to their low transaction costs. As such, they have become increasingly popular as an alternative form of money in both physical and digital economies. Fractional stablecoins offer users the same security, trustlessness, and transparency as other cryptocurrencies, making them a viable option for anyone looking to make secure digital payments.
Fractional stablecoins are arguably the most accessible form of cryptocurrency when it comes to trading or investing in digital assets due to their low barriers-to-entry such as investable amounts and lack of additional fees. Additionally, fractional stablecoins provide users with more flexibility and control over their funds than traditional fiat currencies. This is because fractional tokens can be purchased in smaller amounts without having to go through intermediaries like banks or brokers. As such, fractional stablecoins have the potential to revolutionize how we do business today by providing individuals with a wider range of options for their financial transactions.
Overall, fractional stablecoins are a great way to get into cryptocurrency without having to make large investments or go through complicated approval processes. They offer users the same level of security, trustlessness, and transparency as other cryptocurrencies while allowing them to transact in much smaller denominations than most traditional payment methods. This makes them ideal for micropayments and other uses which require small payments to be made quickly and securely. As such, they have become increasingly popular as an alternative form of money in both physical and digital economies.
Simplified Example
A fractional stablecoin is like a toy that can be broken into smaller pieces. Imagine you have a toy that can be broken into smaller pieces, like lego blocks. Each of those smaller pieces is still a piece of the toy but it's smaller in size. Similarly, a fractional stablecoin is a digital token that is pegged to a stable currency, like the US dollar, but it can be divided into smaller units, so you can buy a fraction of the stablecoin instead of the whole thing. It's like breaking a toy into smaller pieces but each piece still represents a part of the toy, in the same way, a fractional stablecoin represents a fraction of a stable currency.
History of the Term "Fractional Stablecoin"
The term "fractional stablecoins" is commonly employed to characterize a particular stablecoin variant, one that relies on a collateralization ratio of less than 100%. Unlike stablecoins fully backed by their underlying assets, fractional stablecoins derive support from a combination of assets and algorithms. This design aims to enhance capital efficiency and mitigate the necessity for a substantial amount of collateral to uphold the stablecoin's stability. While the precise origin of the term "fractional stablecoins" remains uncertain, it is thought to have gained prominence in the early 2020s, aligning with the evolution of more intricate stablecoin protocols and the escalating interest in decentralized finance (DeFi).
Examples
USDT (Tether): A dollar denominated digital currency, USDT is a stablecoin pegged to the US Dollar that enables users to store and transfer their assets quickly with minimal cost. It is one of the most popular fractional stablecoins available today.
DAI: Developed by MakerDAO, DAI is a decentralized stablecoin designed to maintain its peg against the US Dollar through a series of smart contracts on the Ethereum blockchain. This allows users to transact in DAI without worrying about volatile price fluctuations and enjoy higher liquidity compared to other fiat-backed stablecoins.
TrueUSD: TrueUSD is an Ethereum-based stablecoin that utilizes trustless escrow accounts in order to ensure that its tokens are always backed 1-for-1 by the US Dollar. TrueUSD is one of the most liquid stablecoins available today, making it a great choice for users who want quick and easy access to USD in digital form.