A stablecoin is a type of cryptocurrency designed to maintain a stable value, usually by being pegged to a real-world asset like:
- Fiat currencies (e.g., US Dollar, Euro)
- Commodities (e.g., gold)
- Other cryptocurrencies
🏦 Types of Stablecoins
- Fiat-Backed Stablecoins
- Fully backed 1:1 by fiat held in reserves.
- Examples: USDT (Tether), USDC, BUSD
- Pros: Simple, stable
- Cons: Centralized, trust in custodian required
- Crypto-Backed Stablecoins
- Collateralized with other cryptocurrencies (often overcollateralized).
- Example: DAI (by MakerDAO)
- Pros: More decentralized
- Cons: Can be volatile, needs smart contracts
- Algorithmic Stablecoins
- Use algorithms to control supply and demand, without collateral.
- Example: FRAX (partially algo-based), UST (collapsed)
- Pros: Decentralized in theory
- Cons: Risk of collapse if confidence drops
- Commodity-Backed Stablecoins
- Backed by assets like gold or oil.
- Example: PAXG (backed by gold)
- Pros: Inflation hedge
- Cons: Requires trust in custodian
💡 Use Cases of Stablecoins
- Trading pairs on crypto exchanges
- Cross-border payments (fast and cheap)
- Store of value during volatility
- DeFi (collateral, liquidity pools, yield farming)
- Remittances and salaries in emerging markets
⚠️ Risks to Consider
- Centralization: Fiat-backed coins depend on custodians.
- Regulatory risks: Governments may clamp down.
- Smart contract vulnerabilities (DeFi stablecoins).
- Loss of peg due to mismanagement or panic (e.g., Terra UST).
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