Stablecoins are a type of cryptocurrency designed to minimize price volatility. Unlike other cryptocurrencies, which are subject to strong swings in value, stablecoins maintain a consistent value relative to a “stable asset” such as the US dollar or another fiat currency.
They do this by pegging the cryptocurrency to the relevant fiat currency or an asset with a perceived value. Stablecoins offer many advantages over conventional currencies and other cryptocurrencies. Most notably, they tend to remain more steady and reliable than both fiat currencies and traditional cryptocurrencies, making them an appealing option for traders, investors, and everyday users.
In addition, because stablecoins are rarely affected by severe swings in price, they are often seen as a safer option for storing value and transferring money across borders. There are various methods for creating and managing stablecoins. Some stablecoins are pegged to fiat currencies such as the US dollar, where each stablecoin is backed by an equivalent amount of fiat currency held in reserve.
Others are collateral-backed or algorithmic, meaning they use a variety of algorithms to maintain their value relative to an asset or fiat currency. Finally, some stablecoins are decentralized and managed by smart contracts, meaning they are not backed by a central authority.
In general, stablecoins are considered a much less volatile option than traditional cryptocurrencies due to their ability to maintain a stable value. On the contrary, they are often centralized and do not offer what cryptocurrencies were invented initially.