What are stable coins?


Stablecoins are a type of cryptocurrency designed to maintain a stable value relative to a specific asset, typically a fiat currency like the US dollar. They aim to combine the stability of fiat currencies with the advantages of digital currencies, such as faster transactions and borderless transfer.

There are two primary categories of stablecoins:

  1. Fiat-Collateralized Stablecoins: These are backed by reserves of a fiat currency. For every stablecoin issued, an equivalent amount of fiat currency is held in reserve. Tether (USDT) and USDC are prominent examples, where each coin is theoretically backed by one US dollar held in reserve.

  2. Crypto-Collateralized Stablecoins: These are backed by other cryptocurrencies. They can be more decentralized but are often more complex and involve mechanisms to handle the higher volatility of the underlying crypto assets. MakerDAO's Dai is an example, which is backed by a mix of different cryptocurrencies.

  3. Algorithmic Stablecoins: These do not have direct collateral backing but instead, use algorithmic mechanisms to stabilize their value. They attempt to maintain their peg through a combination of financial engineering and game-theoretical dynamics rather than direct economic backing.

The concept of a stablecoin is pivotal for practical applications such as payments, remittances, and in providing a less volatile store of value within the cryptocurrency space 1 2 3 4 5 6 7.

Exploring Stablecoins

Chris and Nick delve into the world of stablecoins, discussing the controversial pegging to physical assets like Tether and the innovative mechanisms of crypto-native coins like maker die and basecoin. They highlight the complexity of creating a stable coin and the concept of an algorithmic central bank, shedding light on the supply adjustments based on market dynamics.

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