Cryptocurrencies are well known for their high volatility, they can change in price easily, in order to protect user funds from this fluctuation in market price, Stablecoins were created.
What is a Stable Coin?
A stablecoin is a type of cryptocurrency that is pegged to other stable assets like US Dollars.
Stablecoins maintain this peg through reserves of dollars, other cryptos, or a mix of both kept in U.S-controlled bank accounts.
Use cases of Stablecoins.
Apart from being used as a hedge (protection) against crypto market volatility, they are also used for generating passive income through staking or lending.
Types of some popular stablecoins
1) Tether (USDT),
2) USD
3) USDC
4) Euro Coin (EUROC)
5) Binance Dollar(BUSD)
How are Stablecoins maintained?
Stablecoins are maintained by 3 major methods.
1) Fiat or commodity-backed stablecoins.
In this method, all stablecoins in circulation are backed by an equivalent of the value in fiat currency or cash equivalents, 1 USD equivalent is held on reserve in U.S bank accounts owned by the issuer, and monthly these reserves are audited.
for example USDT
Tether is a centralized, fiat-collateralized stablecoin.
2) Cryptocurrency-backed stablecoins.
This method is also known as The decentralized method
It involves pegging stablecoins through crypto-collateralization.
Stablecoins are backed by reserves of other cryptocurrencies.
Due to the fluctuation of the crypto market, stablecoins are usually overcollateralized to help maintain the peg.
for example, Dai which is a decentralized stablecoin is collateralized at 150%, every 1 Dai in circulation is backed by 1.5x its equivalent value in Ethereum.
3) Algorithm-backed statblecoins
These are stablecoins pegged through smart contracts that automatically execute to manipulate the circulating supply depending on market conditions.
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