What is Stablecoin?

Stablecoins were developed to address the price volatility that makes most cryptocurrencies impractical for everyday payments or as a reliable store of value. By anchoring their price to a stable reference, they aim to combine the programmability of digital assets with price predictability.

There are several main categories of stablecoins:

• Fiat-collateralized: Backed one-to-one by reserves of fiat currency or cash equivalents held by a centralized issuer. Examples include USDC and USDT (Tether).
• Crypto-collateralized: Backed by other cryptocurrencies, often overcollateralized to account for the underlying asset’s volatility. DAI is a widely known example.
• Commodity-backed: Pegged to physical assets such as gold, with each token representing a fixed quantity of the commodity.
• Algorithmic: Attempt to maintain their peg through software-driven supply adjustments rather than direct collateral. This model carries significant design risk, as demonstrated by high-profile failures.

Stablecoins serve as a practical medium of exchange within crypto markets, allowing traders to move value between exchanges without converting back to fiat. They are also widely used in decentralized finance (DeFi) protocols for lending, borrowing, and liquidity provision.

Regulatory scrutiny of stablecoin issuers has increased in several jurisdictions, with authorities focusing on reserve transparency, redemption rights, and systemic risk. Not all stablecoins maintain their peg at all times; depegging events have occurred across all categories.