What is a Stablecoin?

Stablecoins are a type of cryptocurrency that pegs its value to another currency, commodity, or financial instrument. This makes them preferable as a medium of exchange compared to other cryptocurrencies, such as Bitcoin and Ethereum, whose value can be highly volatile and are therefore impractical to use as a currency. The most popular stablecoins are pegged to the US Dollar.

How are USD-Pegs Maintained?

All stablecoins that are pegged to the value of the US Dollar are set at a value of one US Dollar ($1.00). Despite this point of commonality, various methods are used to maintain this peg. The three most common methods are: fiat-collateralization, where the stablecoin is backed by a reserve of fiat currency and/or cash equivalents; crypto-collateralization, where the stablecoin is backed by a reserve of cryptocurrencies; and algorithmic, where a combination of dynamic collateralization, dynamic minting and burning, and overcollateralization are employed to maintain the peg.