Stablecoins are cryptocurrencies whose values are tied to other assets like fiat currency, other cryptocurrencies, precious metals and algorithmic functions.¹ Stablecoins "attempt to bridge the gap between fiat currencies and cryptocurrencies"¹ and are inherently built to withstand volatility and considered to be less volatile than other cryptocurrencies.

Types of Stablecoins

While cryptos offer a decentralized payment option, price volatility has been a  deterrent for cryptos being used in day-to-day transactions. To try and tackle this problem, stablecoins were created. Stablecoins can be classified² as:

  1. Fiat-backed stablecoins: The value of the stablecoin is backed by a suitable amount of the currency that is being pegged. Other options like gold and crude oil also come under this category.
  2. Crypto-backed stablecoins: As an alternative to regular fiat, cryptos have also been used to collateralize stablecoins.
  3. Algo-backed stablecoins: These coins are not backed up by any asset, but include a working mechanism to retain a stable price.

Although stablecoins are not regulated, they aim to offer astable option to carry out a transaction through crypto. However, they have recently come under scrutiny from regulators since they aim to provide a replacement to the fiat that central banks control.³

Example

Tether (USDT) is a “blockchain-based cryptocurrency whose tokens in circulation are backed by an equivalent amount of U.S. dollars, making it a stablecoin with a price pegged to USD $1.”⁴

Sources

1. Stablecoin Definition: What Are They and How Do They Work? NerdWallet.

2. Stablecoin. Investopedia.

3. New Crypto Concern: Stablecoins Under Scrutiny From U.S. Regulators. Cheddar.

4. Tether (USDT) Definition. Investopedia.

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