What is Stable Coin? Understand Stable Coin in one minute

Stablecoins offer price stability in the volatile cryptocurrency market by being pegged to fiat currencies, acting as a bridge between traditional finance and digital assets.

Oct 21, 2024 at 09:06 pm

Understanding Stablecoins in 60 Seconds

1. Definition:
Stablecoins are cryptocurrencies pegged to the value of a fiat currency, such as the US dollar, Euro, or British pound.

2. Price Stability:
Unlike regular cryptocurrencies with volatile prices, stablecoins aim to maintain a stable value, typically 1:1 with their pegged fiat currency.

3. How it Works:
Stablecoins are typically backed by reserves of the underlying fiat currency or other highly stable assets like gold or Treasury bonds.

4. Types of Stablecoins:

• Fiat-backed: Fully backed by fiat currency reserves. (e.g., Tether)
• Over-collateralized: Backed by a basket of assets worth more than the value of the stablecoin. (e.g., MakerDAO's DAI)
• Algorithmic: Maintains stability through mathematical formulas and incentives. (e.g., TerraUSD)

5. Uses:

• As a store of value
• For payments and remittances
• As a trading pair for other cryptocurrencies

6. Advantages:

• Stable prices reduce volatility
• Easy integration with traditional financial systems
• Can bridge the gap between fiat and digital currencies

7. Challenges:

• Risk of de-pegging or market manipulation
• May face regulatory scrutiny and compliance issues
• Not immune to fluctuations in the underlying fiat currency value