Stablecoin
Tue, Apr 15Stablecoins are digital currencies based on blockchain technology that are tied to the value of a specific underlying asset. To ensure they maintain their value, stablecoins are supported by reserves that match the total value of the stablecoins in circulation.
For instance, if a stablecoin has a circulating supply of $100 million, its reserves must also be at least $100 million. Because of this peg, stablecoins experience minimal price volatility, which has hindered the widespread adoption of applications built on cryptocurrency protocols.
There are generally four types of stablecoins:
- Fiat collateralized
- Commodity collateralized
- Crypto collateralized
- Non-collateralized
The most prevalent stablecoins are those backed by fiat currencies like the U.S. dollar (USD), euro (EUR), or British pound (GBP). Notable examples include Tether (USDT) and USDC.
Stablecoins are introduced into the market through a process called “minting.” For example, if you send $1 to a stablecoin issuer, you will receive 1 stablecoin in return. When you decide to convert your stablecoins back into fiat currency, you can do so at a 1:1 ratio.
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