Stablecoins are a type of cryptocurrency designed to maintain a stable value relative to a specific asset, typically a fiat currency like the US dollar. Unlike more volatile cryptocurrencies like Bitcoin or Ethereum, stablecoins aim to reduce price fluctuations, making them useful for transactions, savings, or as a bridge between traditional finance and the crypto world. They achieve stability through different mechanisms, which include:

1. Fiat-Collateralized Stablecoins: These stablecoins are backed 1:1 by a reserve of fiat currency (like USD) held in a bank. Examples include Tether (USDT) and USD Coin (USDC). Their value is maintained by ensuring that each coin in circulation is backed by an equivalent amount of the reserve currency.

2. Crypto-Collateralized Stablecoins: Instead of fiat, these stablecoins are backed by other cryptocurrencies. To handle volatility, they are often over-collateralized. For example, DAI is backed by Ethereum (ETH) but is worth approximately one dollar. Users deposit more crypto than the stablecoin’s value to absorb potential price swings in the collateral.

3. Algorithmic Stablecoins: These use algorithms and smart contracts to automatically control the stablecoin's supply, adjusting it as needed to maintain a stable value. For example, if the coin's value drops below the target, the algorithm may reduce supply to increase the price. TerraUSD was a well-known example of this type, although it faced issues due to its reliance on the stability of a separate asset.

4. Commodity-Backed Stablecoins: These are backed by tangible assets like gold, silver, or other commodities. Examples include Tether Gold (XAUT), which is pegged to the price of gold.

Stablecoins are widely used on crypto exchanges, in decentralized finance (DeFi), and as a way for individuals and businesses to transact or store value with minimized exposure to volatility.