What is a Stablecoin? Understanding the Common Types of Stablecoins in the Crypto Market

A stablecoin is a type of cryptocurrency designed to maintain a stable value by being pegged to the value of a reserve asset, often a fiat currency such as the US dollar. The main goal of stablecoins is to minimize the price volatility typically seen in cryptocurrencies like Bitcoin and Ethereum, making them more suitable for everyday financial transactions.

Currently, there are four popular types of stablecoins based on collateral structure:

1. Fiat-collateralized stablecoins: Coins like Tether (USDT) and USD Coin (USDC) are backed 1:1 by fiat money, ensuring that each coin can be exchanged for a unit of real currency.

2. Crypto-collateralized stablecoins: Stablecoins like Dai (DAI) are backed by other cryptocurrency assets, helping to minimize risks due to the price volatility of the underlying currency.

3. Commodity-backed stablecoins: This type, such as Tether Gold (XAUT), ties its value to physical commodities like gold, ensuring stability through the value of tangible assets.

4. Algorithmic stablecoins: Stablecoins like USDD use algorithms to adjust supply and maintain value without relying on support from external assets.

The development and application of stablecoins are increasingly growing in the field of decentralized finance (DeFi) and international trade, thanks to the stability and ease of transaction they provide.