Unlike Bitcoin or Ethereum, whose price fluctuates freely based on supply and demand, a stablecoin aims to maintain a stable value, almost always pegged to a fiat currency such as the dollar (USDT, USDC) or, with lower volume, the euro (EURC).
Types of stablecoins
- Asset-backed: hold cash or cash-equivalent reserves backing every token issued (USDT, USDC).
- Overcollateralized with crypto: backed by other cryptocurrencies deposited in excess to absorb their volatility (DAI).
- Algorithmic: attempt to maintain their peg through automated supply-and-demand mechanisms, with no real collateral; these have been the most prone to losing their peg (TerraUSD in 2022 is the best-known example).
What they're used for
They're the "cash" of the DeFi world: they let you trade, provide liquidity in pools, or store value without leaving the crypto ecosystem or being exposed to the volatility of other tokens.