Stablecoins: A Comprehensive Guide
Introduction
Stablecoins are cryptocurrencies that are pegged to a stable asset, such as the US dollar. This makes them less volatile than other cryptocurrencies, which can fluctuate in value dramatically.
Types of Stablecoins
There are four major types of stablecoins:
- **Fiat-backed stablecoins:** These stablecoins are backed by a fiat currency, such as the US dollar or the euro. USDC, USDT, TUSD, and USDP are examples of fiat-backed stablecoins.
- **Crypto-backed stablecoins:** These stablecoins are backed by another cryptocurrency, such as Bitcoin or Ethereum. Digix Gold Token (DGX) is an example of a crypto-backed stablecoin.
- **Commodity-backed stablecoins:** These stablecoins are backed by a physical commodity, such as gold or silver. Tether Gold (XAUt) is an example of a commodity-backed stablecoin.
- **Algorithmic stablecoins:** These stablecoins use algorithms to maintain their price stability. Basis Cash (BAC) is an example of an algorithmic stablecoin.
How Stablecoin Creators Achieve Price Stability
Stablecoin creators use a variety of mechanisms to achieve price stability, including:
- **Collateralization:** Fiat-backed stablecoins are collateralized by fiat currency. This means that the stablecoin issuer holds an amount of fiat currency in reserve that is equal to or greater than the value of the stablecoins in circulation.
- **Arbitrage:** Crypto-backed and commodity-backed stablecoins use arbitrage to maintain their price stability. If the price of the stablecoin falls below its peg, arbitrageurs can buy the stablecoin and sell the underlying asset to make a profit. This drives the price of the stablecoin back up to its peg.
- **Algorithmic mechanisms:** Algorithmic stablecoins use algorithms to adjust the supply of the stablecoin in circulation. If the price of the stablecoin falls below its peg, the algorithm can increase the supply of the stablecoin. This drives the price of the stablecoin back up to its peg.
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