#NasdaqETFUpdate š Main Types of Stablecoins & Their Mechanisms
1. Fiat-Collateralized Stablecoins
Backed by: Real-world assets like USD held in reserves.
Peg: 1:1 ratio (1 coin = 1 USD).
Examples: USDT (Tether), USDC (USD Coin), BUSD.
Mechanism:
For every coin issued, an equivalent amount of fiat is held in reserve.
Users can redeem the stablecoin for real dollars, maintaining trust and price stability.
ā Pros: Simple, stable, easy to understand.
ā Cons: Centralized, requires trust in the company holding the reserves.
---
2. Crypto-Collateralized Stablecoins
Backed by: Other cryptocurrencies (like ETH).
Over-collateralized: More crypto is locked than the value of the stablecoin issued.
Examples: DAI (by MakerDAO).
Mechanism:
Users lock crypto in smart contracts to mint stablecoins.
If the collateral value drops too much, the system automatically liquidates to preserve the peg.
