Fiat/Commodity-collateralized

These are cryptocurrencies that are practically fiat or commodity collateralized on a unit ratio of 1:1 or other specific ratios. It is in actual sense, a digital representation of a fiat currency or commodity. To participate, a user deposits fiat currency into a bank account, and the equivalent digital coin is issued. When users want to liquidate back into fiat money, their digital coins are destroyed, and fiat currency wired to them. This model requires a trusted custodian that warehouses the equivalent fiat currency or commodity, and grants access to appointed external auditors to keep the system true and transparent. Notable cryptocurrencies operating this model are Tether, TrueUSD and Digix Gold (with gold collateral instead of USD).

Advantages

• Simplicity
• Guaranteed Stability
• Safe from cyber-attacks since collateral is off blockchain

Disadvantages

• At a risk of mismanagement because it is controlled by a central entity, and defeats the essence of the blockchain’s decentralization
• Requires regular audits to ensure transparency
• Slow conversion to fiat
• Loss of anonymity at the point of redemption