💵 #StablecoinMechanisms101: How stablecoins maintain stable value.
Stablecoins are essential in the crypto world — but not all work the same way.
📌 What is a stablecoin?
🔹 A token that seeks to maintain parity with a stable currency, such as the dollar
🔹 Used for protection against volatility, liquidity, and fast transfers
💡 Main stability mechanisms:
1. Fiat-collateralized (centralized)
🔸 Ex: USDT, USDC, BUSD
🔹 Backed by real dollar reserves
✔️ More stable
❌ Depend on centralized institutions
2. Crypto-collateralized (decentralized)
🔸 Ex: DAI
🔹 Backed by ETH, BTC, and other crypto assets
✔️ On-chain transparency
❌ Liquidation risk during severe drops
3. Algorithmic (experiments)
🔸 Ex: Frax, (and the failed case of UST)
🔹 Control supply and demand with algorithms
✔️ Do not require large reserves
❌ High instability — risk of collapse
⚠️ Not every stablecoin is "truly" stable.
Always research the mechanism behind it before using.
➡️ Understanding how a stablecoin works is the first step to using it with confidence.
