What is Stablecoin
Stablecoins are cryptocurrencies whose value is pegged to a "stable" asset such as fiat currency or commodity. For example, a stablecoin pegged to the US dollar is, theoretically, always priced at $1. Stablecoins are designed to be an alternative to most cryptocurrencies, whose prices are highly volatile. There are primarily four types of stablecoins, defined by the underlying assets used as collateral.
The most popular stablecoins are backed 1:1 by fiat currency. Fiat currency is deposited to issuers in exchange for stablecoins. US dollar-backed stablecoins are the most common, including $USDT, $USDC, $BUSD, etc. There are also fiat-backed stablecoins for Euro ($EUROC) and others.
Crypto-backed stablecoins are also pegged to the US dollar but have another cryptocurrency as collateral. These stablecoins are often over-collateralized to compensate for risks associated with price fluctuations in the underlying asset. For example, $DAI is backed by $ETH deposited in MakerDAO vaults.
Commodity-backed stablecoins are collateralized by physical assets like precious metals. For example, one Pax Gold ($PAXG) token represents one fine troy ounce of a London Good Delivery gold bar.
Algorithmic stablecoins rely on algorithms and smart contracts to keep their peg. If an algorithmic stablecoin's price falls below the price of the fiat currency it tracks, its circulating supply will be reduced to increase its price and thus restore its peg. $FRAX, pegged to the US dollar, is partially backed by collateral and partially stabilized algorithmically. $USTC (formerly known as $UST) was the infamous failed algorithmic stablecoin that lost its peg to the US dollar in May 2022.
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