Stablecoins What are they?

Stablecoins are a type of cryptocurrency designed to maintain a stable value, usually pegged to an external asset, such as fiat currencies (e.g. US Dollar, Euro) or commodities (e.g. gold). The purpose of stablecoins is to reduce the volatility common in other cryptocurrencies, such as Bitcoin and Ethereum, making them more suitable for daily transactions, storage of value, and use in smart contracts.

Main types of Stablecoins:

1. Fiat-backed

Example: USDT (Tether), USDC, BUSD.

These stablecoins are backed by fiat currency reserves (e.g. dollars) held in banks or other financial institutions.

2. Commodity-backed

Example: PAX Gold (PAXG), Tether Gold (XAUT).

The value is backed by commodities such as gold, offering a more tangible alternative.

3. Algorithmic (or decentralized)

Example: DAI, UST (Terra, before the collapse).

Use algorithms and smart contracts to adjust supply and maintain stable value, without direct physical collateral.

4. Cryptocurrency-backed

Example: DAI (partially), sUSD.

Use other cryptocurrencies as collateral, but are generally over-collateralized to protect against collateral volatility.

Advantages of Stablecoins:

Price stability: Facilitate payments and contracts on the blockchain.

Accessibility: Allow global access to financial services without intermediaries.

Speed ​​and cost: Fast transactions and generally cheaper than traditional banks.

Risks:

Centralization risk: Stablecoins backed by fiat currency may depend on a centralized entity.

Collapses: Algorithmic may fail to maintain parity (e.g. Terra's UST).

Regulation: Many governments are implementing strict regulations for stablecoins.

Stablecoins are essential to the crypto ecosystem, acting as a bridge between the traditional world and the blockchain.