What are Stablecoins?

Stablecoins are a type of cryptocurrency that are designed to maintain a stable value relative to a specific asset or a pool of assets. They are often pegged to a currency like the US dollar, Euro, or to a commodity like gold.

Stablecoins were developed to address the high volatility often associated with digital currencies, providing a more stable option for transactions. This stability is crucial for practical, everyday uses where significant price fluctuations can be a challenge.

There are three main types of stablecoins:

Fiat-collateralized Stablecoins: These are backed by fiat currency at a 1:1 ratio. For each stablecoin issued, there is a real dollar or other fiat currency stored in a bank account. Examples include USDC, Tether (USDT), and Paxos Standard (PAX).

Crypto-collateralized Stablecoins: These are backed by other cryptocurrencies. Because cryptocurrencies are volatile, these stablecoins are often over-collateralized to absorb large price swings. An example is DAI, which is backed by Ether.

Algorithmic Stablecoins: These are not backed by any collateral. Instead, they use algorithms and smart contracts to automatically adjust the supply of the stablecoin, increasing and decreasing it to maintain its value. Examples include Ampleforth and Basis Cash.

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Stablecoins are used for a variety of purposes in the crypto ecosystem. They can provide a safe haven during volatile market conditions, enable quick transactions with a stable value, and are often used in decentralized finance (DeFi) applications.