A stablecoin refers to any cryptocurrency whose exchange rate attempts to be more stable by being pegged to an asset with a more stable value (e.g., fiat currency or a physical instrument).
As you may know, the cryptocurrency market is characterized by high volatility. Therefore, investing in digital assets is inherently risky.
However, not all virtual coins are subject to sharp price fluctuations. Unlike regular cryptocurrencies, stablecoins, whose value is tied to tangible assets, withstand periods of high turbulence in the crypto market. Converting coins into stablecoins before or even during a turmoil can protect an investor's portfolio from significant losses.
It's important to note that being tied to fiat currencies or physical instruments in no way deprives stablecoins of the advantages inherent to cryptocurrencies. This type of asset is also a versatile unit of account and is convenient for trading.
- Fiat-backed (e.g., tied to the US dollar, euro, or British pound)
The most prominent representative of this group is the Tether token, whose value is pegged to the USD. Today, it is the largest stablecoin by market capitalization, second only to giants like Bitcoin and Ethereum.
- Asset-backed (e.g., backed by gold, oil, or even a real estate portfolio)
Gold-backed stablecoins are most commonly found in the crypto market. When you purchase 1 coin, you automatically become the owner of 1 troy ounce or 1 gram of the specific precious metal in a particular ingot (the level of backing may vary). Among the most popular "gold" stablecoins are Digix Gold, Tether Gold, and Paxos Gold.
The most popular stablecoin in this category is MakerDAO. It is pegged to the US dollar and simultaneously backed by Ethereum through a smart contract. In other words, for every new coin created, the company must back its value with new ETH in a 1:1.5 ratio.
These stablecoins do not have direct reserves. Their price stability is maintained by special algorithms, smart contracts, or user actions (e.g., arbitrage). The prices of such coins are more volatile than those of asset-backed stablecoins. The most well-known representatives of this category to date are Ampleforth, Empty Set Dollar, Basis Share, and TerraUSD.