What is a Stablecoin?
It is a cryptocurrency designed to have a stable value, almost always linked to $1 USD. It serves as a refuge against volatility, for trading on exchanges, and for use in DeFi.
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The 3 Main Types (and their key differences)
1. Fiat-backed (Ex: USDT, USDC)
· What are they? They are guaranteed by real money (USD, EUR) held in a bank by a company.
· Main difference: They are centralized. You need to trust that the company has the money it says it has (needs audits).
2. Crypto-backed (Ex: DAI)
· What are they? They are guaranteed by other cryptocurrencies (like ETH), but in an over-collateralized way (locking $150 in ETH to issue $100 in stablecoins).
· Main difference: They are decentralized. You do not trust a company, but a transparent code (smart contracts). They are more complex.
3. Algorithmic (Ex: UST - failed)
· What are they? They have no real backing. They use algorithms and mechanisms of burning and issuing tokens to control supply and maintain price.
· Main difference: They are the riskiest and most experimental. Their stability depends purely on user trust. If this is lost, they can collapse.
