Questions ยป What is a stablecoin?

What is a stablecoin?

A stablecoin is a type of cryptocurrency that is designed to maintain a stable value relative to a specific asset, such as a fiat currency like the US dollar or a commodity like gold. Unlike other cryptocurrencies like Bitcoin or Ethereum, which can experience significant price fluctuations in short periods of time, stablecoins are designed to provide a more stable store of value that can be used for transactions or as a store of wealth.

Stablecoins can be categorized into three main types:

  1. Fiat-collateralized stablecoins: These stablecoins are backed by a reserve of fiat currency, such as the US dollar, held in a bank account. Examples of fiat-collateralized stablecoins include Tether (USDT), USD Coin (USDC), and TrueUSD (TUSD).
  2. Crypto-collateralized stablecoins: These stablecoins are backed by a reserve of other cryptocurrencies, typically Ethereum or Bitcoin. Examples of crypto-collateralized stablecoins include Dai (DAI) and BitUSD (BITUSD).
  3. Non-collateralized stablecoins: These stablecoins use algorithmic mechanisms to maintain their stability without the need for a reserve of assets. Examples of non-collateralized stablecoins include Basis Cash (BAC) and FRAX (FRAX).

Stablecoins are used for a variety of purposes, including as a hedge against the volatility of other cryptocurrencies, as a means of payment or remittance, and as a store of value. They can be traded on cryptocurrency exchanges and used in decentralized finance (DeFi) applications, such as lending and borrowing platforms, as well as in online marketplaces and e-commerce platforms.