Page 82 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.79, # 1, 2022, pp. 80-89

Centralized currency schemes preceded decentralized currencies. Centralized
currencies have a central depository and are usually managed and controlled by a
single entity. Decentralized currencies do not have a single depository center and are
issued and operate in a decentralized manner. Centralized virtual currencies rely on
third parties to create new virtual currencies, verify transactions, and manage the
accounting of the account. Decentralized systems refer to systems that do not have a
central governing body (for example, the Central Bank) and virtual currencies are
not issued from a single center (Khayaladdin Tagiyev and Aysel Hasanli: 2018, BIS
November 2020: Stablecoins-risks, potential and regulation).

Decentralized virtual currencies operate on the basis of blockchain or distributed
ledger technology (DLT). Blockchain technology is an innovative platform that
enables transactions in payment systems, clearing and settlement, especially in e-
Government systems, using procedures and protocols. DLT is an architecturally
decentralized network environment that does not require the involvement of
intermediaries to verify and authorize transactions. All payment transactions are
crypto-protected, and as they enter the DLT network, a direct (Peer-to-Peer)
connection is established between the beneficiary and the issuer without
intermediaries.

Stablecoin is a type of cryptocurrency that is backed by assets such as any country's
national currency or gold and is designed to provide more stability than other
cryptocurrencies. There are several types of stablecoins (European Central Bank
November 2021, BIS November 2020: Stablecoins-risks, potential and regulation):
1. Fiat-backed stablecoins;
2. Crypto-backed stablecoins;
3. Commodity-backed stablecoins;
4. Algorithmic stablecoins.

Stabilcoins backed by the national currency are the most common type. Unlike other
cryptocurrencies with sharp fluctuations in value, stablecoins supported by the
national currency are subject to very small price fluctuations. However, this does not
mean that these types of stablecoins are completely safe, they are relatively new in
the market and caution must be excercised in investing because there is not enough
information about the risks.

Volatility is high in crypto-backed stablecoins. For example, a $1 crypto-backed
stablecoin may be tied to an underlying crypto asset worth $2, so if the underlying
crypto loses value, the stablecoin has a built-in cushion and can remain at $1.

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