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Stablecoins aim to keep their value “pegged” or stable in relation to a specific asset or the price of an asset.
Made to withstand market volatility, they prove to be an effective medium of exchange.
There are two types of stablecoins, based on the type of asset they are tied to.
Reserve-backed stablecoins like USDC maintain a 1:1 ratio with the US dollar. For every USDC token, there is $1 held in the USDC treasury.
Algorithmic stablecoins are tied to the target price of $1. To keep the $1 peg, the algorithm adjusts the supply.
If the token price exceeds $1, the algorithm increases the supply to bring the price down, and vice versa.
Stablecoins allow crypto users to make purchases, lend, borrow, and do much more without relying on volatile assets like Ethereum and Bitcoin.
Some coins, however, have lost their peg in the past.
Stablecoins may trade below $1 during exceptional market stress when holders lose confidence in the backing of the coin.
But normally, the price of a stablecoin will not change by more than a few thousandths of a dollar.
The first stablecoins were released in 2014, and while they’re not as old and ubiquitous as Bitcoin, they have quickly become critical to the ecosystem.
Today, there are a variety of stablecoins on every major blockchain.
Hint: Stablecoins were created to be less volatile than other cryptocurrencies