Stablecoin
A cryptocurrency designed to maintain a stable value, often pegged to a fiat currency like the US Dollar. The value of the stablecoin is typically kept close to the value of the fiat currency it’s pegged to, such as 1 stablecoin = 1 US Dollar, to reduce volatility compared to other cryptocurrencies.
What Is Stablecoin?
A stablecoin is a type of cryptocurrency designed to maintain a stable value by pegging it to a reserve asset like a fiat currency (e.g., USD) or a commodity (e.g., gold). Stablecoins aim to minimize the price volatility that typically affects cryptocurrencies like Bitcoin and Ethereum.
How It Works
- Pegging: Stablecoins are usually pegged to a stable asset like the U.S. Dollar at a 1:1 ratio, meaning 1 stablecoin is always worth 1 USD (or the equivalent in another fiat currency).
- Types:
- Fiat-Collateralized Stablecoins: Backed by real-world assets like USD or EUR, stored in a bank or other reserve. Example: Tether (USDT), USD Coin (USDC).
- Crypto-Collateralized Stablecoins: Backed by other cryptocurrencies, which are held in a smart contract to ensure stability. Example: DAI.
- Algorithmic Stablecoins: Not backed by any physical collateral, but use algorithms to increase or decrease the supply of the coin based on market conditions to maintain stability. Example: TerraUSD (UST) before its collapse.
Why Use Stablecoins?
- Stability: Ideal for people who want to hold value in crypto but avoid wild price swings.
- Ease of Use: Can be used for transactions, trading, or as a store of value without the risk of rapid depreciation.
- Cross-border Transactions: Helpful for sending money across borders without relying on traditional financial systems.
The Sum Up
In short, stablecoins combine the benefits of cryptocurrencies (like fast and low-cost transactions) with the stability of fiat currencies.