What is a stablecoin, and how does it keep its value?

Unlike other cryptocurrencies, the value of stablecoins is always kept to 1 USD approximately. That’s because the digital currencies are backed by collaterals, which are assets offered as security for repayment in the event of a default. But did you know there are the following 4 kinds of stablecoins? 

Fiat-backed Stablecoins

They are typically pegged to the value of fiat money in a 1:1 ratio. This means if there is an amount of $1,000 in reserves, only 1,000 stablecoins worth $1 each can be circulated. The USD Coin (USDC) is an example of a stablecoin that combines the stability of the US Dollar with blockchain technology.

 

Cryptocurrency-backed Stablecoins

These stablecoins are pegged to a cryptocurrency asset to maintain their value.  For example, users can borrow DAI stablecoins by depositing Ethereum-based assets as collateral, and smart contracts hold the collateral in escrow until the borrowed DAI has been returned.

 

Algorithmic Stablecoins

These stablecoins depend on smart contracts to maintain their value, instead of a pegged asset. TerraUSD (UST), for example, uses algorithms to automatically expand or contract the number of tokens in circulation to maintain its value.

 

Commodity-Backed Stablecoins

Instead of the US dollar, these stablecoins are pegged to commodities like gold, silver, or real estate. For example, each PAX Gold (PAXG) token is pegged to one troy ounce (t oz) of a 400-ounce London Good Delivery gold bar.

 

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