Stablecoin is a type of cryptocurrency for which it has been possible to achieve a stable market price that weakly depends on the general volatility of cryptocurrency markets. This is provided in different ways, however, in any case, stablecoins are not subject to such significant price fluctuations as was observed with Bitcoin and its explosive increase in value.
There are quite a few varieties of such cryptocurrencies, but most of them are strictly pegged to the price of other real assets. For example, stablecoin can be pegged to the value of the US dollar, a barrel of oil, a gram of gold or silver. An alternative is pegging to a more stable cryptocurrency, e.g. the notorious Bitcoin.
Stablecoin types
The most common option is stablecoin pegged to some material asset. Examples include USD Coin (USDC), Paxos (PAX) and TrueUSD (TUSD). Usually 1 to 1 proportions are used, i.e. you can get 1 USD Coin for 1 dollar. This, in addition, means that new coins can appear only if the amount on the fiat account increases.
The second common option is cryptocurrency stablecoins. As a rule, they are pegged to more stable coins, and the price support mechanism is ensured by the stability of the system and overcollaterisation. An example is DAI tied to the Ethereum-based Decentralised Autonomous organisation system.
If the coins are not provided with material collateral, then strict algorithms governing the supply of new tokens are used, which allows maintaining their price relatively stable. These algorithms, for example, are able to automatically reduce or expand a negotiable offer in response to market behaviour.
What is their advantage?
Stablecoins combine the strengths of both fiat and crypto currencies. On the one hand, they are much more stable in price, on the other hand, they provide greater transparency and reliability of transactions which the traditional currency was previously used for. Not to mention that such transactions are faster and cash fees are lower. Therefore, stablecoins are increasingly used not only by large companies but also by ordinary people both for everyday payments and for international transfers.