Definition and purpose
A stablecoin is a cryptocurrency that’s designed to maintain a stable value, usually pegged to a fiat currency like the US dollar or euro. It combines blockchain technology with price stability.
How stablecoins are backed
There are different types of stablecoins:
- Fiat-backed: Each token is backed 1:1 by money held in reserve (e.g. USDC, USDT).
- Crypto-backed: Backed by other cryptocurrencies, with overcollateralization (e.g. DAI).
- Algorithmic: Use smart contracts to balance supply and demand, but are riskier (e.g. UST – now collapsed).
Why stablecoins matter
Stablecoins make it easy to transfer value without the volatility of Bitcoin or Ethereum. They are used for trading, payments, and as on/off ramps between crypto and fiat systems.
Risks to consider
Not all stablecoins are equally safe. Transparency, reserves, and regulation vary. It’s important to research how a stablecoin is structured before using or holding it.
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