Stablecoins are a type of digital currency designed to maintain a stable value by pegging it to certain assets such as the US dollar, gold, or other fiat currencies and commodities. The goal of these currencies is to reduce the sharp volatility experienced by digital currencies like Bitcoin and Ethereum, making them more reliable for everyday use and financial transactions.
Types of stablecoins
1. Fiat-backed stablecoins:
Backed 1:1 by a currency like the US dollar or euro, with these reserves held in banks. Example: USDT (Tether), USDC (USD Coin), BUSD (Binance USD).
2. Crypto-backed stablecoins:
Backed by digital assets like Ethereum or Bitcoin, and use smart contracts to maintain their stability.
Example: DAI (MakerDAO).
3. Algorithmic stablecoins:
Not reliant on direct reserves, but use algorithms and economic mechanisms to control supply and demand to maintain stability.
Example: FRAX, UST (before its collapse).
Uses of stablecoins
International money transfers quickly and at a lower cost than banks.
Trading in digital currency markets without needing to convert to fiat currencies.
Protection against market volatility by holding value in stable assets.
Enable decentralized finance (DeFi) services, such as lending and borrowing.