A stablecoin is a cryptocurrency whose value is tied to the value of any fiat currency (dollar, euro, ruble, yuan).
What are they used for? - it’s convenient to pay with them, since in essence it’s ordinary money, just in the blockchain, they are less susceptible to exchange rate changes, and with the help of them you can “fix” profits from the sale of another cryptocurrency.
All stablecoins can be divided into three groups:
1. Backed by cash in the bank 1:1. For example USDT, USDC. Each such token is backed by a real dollar, if we talk about USDT or USDC, if the currency is different, the scheme remains the same. The dollars are in one of the bank accounts of the company that issued this token. The release of new tokens is carried out by “freezing” your fiat funds in a bank account. Such stablecoins are fully licensed for use, and the companies that issue them constantly undergo various checks. But it does not follow from the collateral mechanism that the price of the token does not change at all; it changes, but as a rule, not significantly. In order to return your fiat funds, you must return all stablecoins.
2. Backed by collateral in cryptocurrency. For example DAI. For such tokens there is a liquidation threshold. Such tokens are issued by providing collateral in the form of a certain cryptocurrency. But it is necessary to take into account that the amount of the pledge will always be greater than the total amount of issued tokens. This is done to ensure the value of the stablecoin. Liquidation means that if the value of your collateral falls below a certain level, the collateral will be automatically sold to secure the value of the issued stablecoins. In order to get your collateral back, provided it has not been liquidated, you must return all issued stablecoins and pay a fee.
3. Algorithmic stablecoins without any reinforcement. For example USDN, AMPL. The price of such tokens is regulated by special algorithms. Since algorithms can be very different, using the example of one will not help you understand the work of other algorithms.
There are also stablecoins pegged to gold, such as PAX gold (PAXG) or other valuable resources.
This diagram clearly shows the pros and cons of all types of stablecoins.
Capital efficiency - what this means here is that it is somewhat unprofitable to issue stablecoins backed by cryptocurrency on your own due to the need to provide collateral, the price of which is higher than the resulting tokens.
Fiat-backed tokens are completely centralized! This means that they can be frozen through a function in the smart contract, regardless of what wallet they are on (cold or hot, custodial or non-custodial).