Overview of Stablecoins
Stablecoins are cryptocurrencies designed to minimize price volatility by pegging their value to stable assets like fiat currencies (e.g., USD), commodities, or other cryptocurrencies. They bridge traditional finance and crypto, offering stability for trading, remittances, and DeFi. Below is a summary:
Types of Stablecoins
Fiat-Backed Stablecoins:
Pegged to fiat currencies (e.g., USD, EUR) and backed by reserves of cash or equivalents.
Examples: USDC, Tether (USDT), Binance USD (BUSD).
USDC is backed by USD and short-term Treasuries, held by regulated institutions like The Bank of New York Mellon, with BlackRock managing the Circle Reserve Fund.
Pros: High stability, regulatory compliance (e.g., USDC’s monthly audits).
Cons: Centralization, counterparty risk (e.g., SVB collapse).
Commodity-Backed Stablecoins:
Pegged to assets like gold or real estate.
Example: Tether Gold (XAUT).
Pros: Diversified backing.
Cons: Less liquid, complex reserve management.
Crypto-Backed Stablecoins:
Backed by cryptocurrencies (e.g., ETH) via smart contracts, managed by DAOs.
Example: DAI by MakerDAO, collateralized by ETH and other crypto.
Pros: Decentralized, transparent.
Cons: Higher volatility risk (e.g., DAI dropped to $0.931 in 2018).
Algorithmic Stablecoins:
Maintain pegs through supply adjustments via algorithms, not backed by reserves.
Example: TerraUSD (UST, collapsed in 2022).
Pros: Fully decentralized.
Cons: High failure risk (e.g., UST’s crash).
Yield-Bearing Stablecoins:
Earn interest through DeFi lending or staking while maintaining stability.
Example: Some USDC integrations on platforms like Ledger Live.
Key Features of Stablecoins
Price Stability: Pegged to assets to mitigate crypto volatility (e.g., USDC’s 1:1 USD peg).
Liquidity: High trading volumes (USDC: $9.21 billion daily) support DeFi, trading, and payments.
