$ETH Stablecoins are a type of cryptocurrency designed to maintain a stable value, typically pegged to a fiat currency like the US Dollar (USD), Euro (EUR), or commodities like gold. Their main goal is to combine the benefits of crypto (like fast transactions and decentralization) with the price stability of traditional currencies.
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🔑 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.
✅ Pros: Simple, stable, easy to understand.
❌ Cons: Centralized, requires trust in the company holding the reserves.
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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.
✅ Pros: Decentralized, transparent.
❌ Cons: Volatile collateral, complex mechanics, risk of liquidation during market crashes.
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3. Algorithmic Stablecoins (Non-Collateralized)
Backed by: No real assets — relies on supply and demand algorithms.
Examples: AMPL (Ampleforth), formerly UST (Terra).
Mechanism:
The protocol expands or contracts supply to maintain the peg.
If price > $1, it mints more coins; if < $1, it burns coins.
✅ Pros: Fully decentralized, scalable.
❌ Cons: Risky — can collapse if the market loses confidence (e.g., Terra/UST crash).
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4. Commodity-Backed Stablecoins
Backed by: Physical assets like gold, silver, or oil.
Examples: PAXG (Paxos Gold), Tether Gold (XAUT).
Mechanism:
Each stablecoin is backed by a specific amount of the commodity held in custody.
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