What are stablecoins and how do they work? 🤑
Stablecoins are cryptocurrencies designed to maintain a stable value, usually pegged to assets like the US dollar. They offer the benefits of crypto without the extreme volatility, making them useful for trading, payments, and as a store of value.
There are mainly four types of stablecoins 👇
◾️ Fiat-Collateralized: Backed by fiat currency reserves held in banks. For example, USDC (Circle) is pegged 1:1 to the US dollar and claims to be backed by dollar reserves.
◾️ Commodity-Backed: Pegged to physical assets like gold or other commodities. PAX Gold (PAXG) is the stablecoin tied to the price of Gold, it's backed by real gold stored in vaults.
◾️ Crypto-Backed: Backed by crypto like Ethereum or other coins. DAI is the biggest such stablecoin.
◾️ Algorithmic Stablecoins: Maintain their peg using algorithms and smart contracts without actual reserves. Frax (FRAX) uses a combination of collateral and algorithms to stabilize its value relative to the USD.
🔍 Understanding stablecoins is crucial. For example, remember the collapse of algorithmic stablecoin TerraUSD? It showed how important it is to understand that even multi-billion dollar systems can fail, leading to UST losing 99.9% of its value.
It's important to store your "crypto dollars" safely. Right now, the safest stablecoin is likely USDC by Circle 🤑
