Stablecoins are digital currencies that tend to peg their market value to some external benchmark. This can be a specific value of a physical asset, such as gold or the U.S. dollar, or a basket of securities. The main purpose of stablecoins is to provide stability in the notoriously volatile cryptocurrency market.
Types of Stablecoins
This is the simplest type of stablecoin. Each unit of this type of stablecoin is backed by a unit of fiat currency, such as the U.S. dollar, at a 1:1 ratio. The fiat currency is held in a bank and the stable coins are issued against these reserves. Tether (USDT) and USD Coin (USDC) are popular examples of stable coins backed by fiat reserves.
These stablecoins are backed by other cryptocurrencies. Because of the volatility inherent in cryptocurrencies, these stable coins are often over-collateralized to absorb large price swings. DAI is a well-known cryptocurrency stackcoin with collateral.
Algorithmic stablecoins may or may not hold reserve assets. Their primary distinction is the strategy of keeping the stablecoin's value stable by controlling its supply through an algorithm, essentially a computer program running a preset formula.
The future of stablecoins
The future of stable coins looks promising. As more people and businesses begin to realize the benefits of blockchain technology, the demand for stable digital currencies is likely to grow. Moreover, with the rise of decentralized finance (DeFi), stable coins will play an even greater role in the future of finance. A large number of companies in business relationships are already increasingly using USDT to pay for services.