Stablecoins are cryptos pegged to the value of another asset, such as a currency, commodity, or any financial instrument. They offer a stable alternative to the volatility of popular cryptos like Bitcoin, making them more suitable for everyday transactions.
Stablecoins are vital due to their price stability. While cryptos like Bitcoin and Ethereum provide benefits like decentralized payments, their unpredictable prices make them challenging for regular use. Stablecoins address this by linking their value to more stable assets, typically fiat currencies. This connection helps maintain their value over time, encouraging their adoption in daily transactions.
Stablecoins avoid the wild price swings common in crypto markets by pegging to real-world assets. Beyond reduced volatility, stablecoins offer several advantages, including global accessibility, 24/7 availability to anyone with internet access, and relatively fast, cheap, and secure transactions. Their internet-native nature also makes them programmable.
For example, stablecoins like USD Coin and Binance USD are pegged to the US Dollar, while Dai is tied to other cryptos, and PAX Gold is linked to precious metals like gold.
There are three major types of stablecoins: fiat-collateralized, crypto-collateralized, and non-collateralized (algorithmic).
- Fiat-collateralized stablecoins are backed by specific assets, like fiat currency, held in reserve.
- Non-collateralized stablecoins, however, use algorithms to adjust supply based on demand to maintain a stable price.
