Stablecoins are cryptocurrency assets that have been designed to remain relatively ‘stable’ in price. Stablecoins provide liquidity without being volatile, and this is appealing to those that don’t want to convert their funds back to fiat currencies when trading.
The volatility of most cryptocurrencies makes them such risky investments. On the other hand, stablecoins have negligent price fluctuations and have their value pegged to a fiat currency. An example of this would be Tether (USDT), which is the most widely-used stablecoin right now. Each USDT token is equal to $1 USD.
There are three main types of stablecoins in use right now:
Fiat-backed; These are the most popular stablecoins, treating fiat currencies as collateral. With a 1:1 ratio, traders can easily trade in stablecoins for the equivalent value in their respective fiat currencies.
Crypto-backed; These stablecoins are instead using cryptocurrencies as collaterial and are issued through smart contracts. Users pay stablecoins back into the contract to receive the equivalent in respective cryptocurrencies.
Algorithmic; These stablecoins aren’t backed by neither fiat nor crypto assets. Instead, this system is based on algorithms and smart contracts. Algorithmic stablecoins can have their token supply reduced or increased depending on price.