A stablecoin is a type of cryptocurrency that is designed to maintain a stable value by being pegged to a reserve asset, usually a fiat currency like the US dollar, or other stable assets such as gold or other cryptocurrencies. The primary purpose of stablecoins is to provide liquidity and stability in the cryptocurrency markets, making them useful for transactions, savings, or as a hedge against the high volatility typically associated with cryptocurrencies.
Types of Stablecoins
Fiat-Collateralized Stablecoins:
These are backed by fiat currency at a 1:1 ratio, meaning for each stablecoin issued, there is a specific amount of fiat currency held in reserve. This is the simplest and most common type of stablecoin.
Crypto-Collateralized Stablecoins:
These stablecoins are backed by other cryptocurrencies. Because the reserve cryptocurrency may also be volatile, these stablecoins are often over-collateralized to ensure stability.
Commodity-Collateralized Stablecoins:
These are backed by other commodities like gold, oil, or real estate. These stablecoins appeal to users who want to invest in physical assets but in a digital and more liquid form.
Algorithmic Stablecoins:
Unlike other types of stablecoins, algorithmic stablecoins are not backed by any reserve but rather rely on a working mechanism, like that of a central bank, to control the supply of tokens in circulation in order to maintain the peg.
Major Stablecoins in Circulation
Tether (USDT):
Tether is the most widely used fiat-collateralizedstablecoin, pegged to the US dollar. It is often used as a medium of exchange and a way to store value in the cryptocurrency ecosystem.
USD Coin (USDC):
Like Tether, USDC is pegged to the US dollar and is widely regarded for its transparency and full backing by US dollars held in accounts subject to regular public reporting of reserves.
Dai (DAI):
Dai is a crypto-collateralized stablecoin that maintains its peg through an autonomous system of smart contracts on the Ethereum blockchain, and is over-collateralized with other cryptocurrencies.
Stablecoins play a critical role in the functioning of the wider cryptocurrency market by offering reduced volatility and increased liquidity, thereby enabling traders and investors to manage risk more effectively. They bridge the gap between the traditional financial world and the digital crypto economy.
As of May 2024, the total stablecoin marketcap has surpassed US$160bn according to DeFiLlama.
