Stablecoins are a type of cryptocurrency designed to maintain a stable value relative to a specific asset or basket of assets, often pegged to traditional fiat currencies like the US dollar, euro, or commodities like gold. Unlike other cryptocurrencies, whose values can be highly volatile, stablecoins aim to provide a consistent value, making them useful for transactions, remittances, and as a store of value.
There are various types of stablecoins, including:
- Fiat-Collateralized Stablecoins: These are backed by reserves of fiat currency held by a central entity. For every stablecoin issued, there is an equivalent amount of the currency in reserve. Examples include Tether (USDT), USD Coin (USDC), Binance USD (BUSD), TrueUSD (TUSD), Pax Dollar (USDP), and Gemini Dollar (GUSD).
- Crypto-Collateralized Stablecoins: These are backed by other cryptocurrencies rather than fiat. They require over-collateralization to account for the volatility of the backing assets. An example is DAI, which is backed by Ethereum and other cryptocurrencies.
- Algorithmic Stablecoins: These use algorithms and smart contracts to manage the supply of the stablecoin in circulation, attempting to maintain price stability without the need for physical collateral. Examples include Ampleforth (AMPL) and TerraUSD (UST).
Stablecoins are popular in the crypto ecosystem for their ability to bridge the gap between traditional financial systems and digital currencies, providing a stable medium of exchange, particularly in decentralized finance (DeFi) applications.