What is a stablecoin?

As the name suggests, a stablecoin is a cryptocurrency that has been designed with the aim of minimizing price volatility. Most stablecoins have been designed to be equal to the US dollar, the world’s leading reserve currency. For example, a single currency unit of the largest stablecoin, Tether (USDT), is intended to be equal to one US dollar.

How do stablecoins work?

There are three different ways of achieving this — delivering a happy medium between offering the stability of fiat currencies and the decentralized benefits that virtual currencies provide. The first type of stablecoin is collateralized by fiat. Next, you have stablecoins collateralized by crypto. Non-collateralized stablecoins, on the other hand, make use of algorithms to control the supply of tokens in order to keep the price fixed at a predetermined level.

Why are stablecoins so popular?

Stablecoins can provide a critical infrastructure layer for the digital assets ecosystem. Stablecoins are simply price-stabilized cryptocurrencies, meaning they incorporate many of bitcoin or ether’s most compelling features: programmability (e.g., smart contract integration), efficiency (e.g., low-to-zero transaction fees, fast settlement times), fungibility, open (i.e., permissionless) access, and so on.