What are stablecoins and how do they work?

Stablecoins are cryptocurrencies that are designed to maintain a stable price over time. Stablecoins are often pegged to fiat currency, such as the US dollar, and backed by collateral. People primarily use stablecoins on DeFi platforms and to hold money within the crypto ecosystem.

How many types of stablecoins are there?

There are three types of stablecoins, based on the mechanism used to stabilize their value. Fiat-collateralized stablecoins maintain a reserve of a fiat currency (or currencies) such as the U.S. dollar, as collateral assuring the stablecoin's value.

Is a stablecoin collateralized?

A third variety of stablecoin, known as an algorithmic stablecoin, isn’t collateralized at all; instead, coins are either burned or created to keep the coin’s value in line with the target price. Let’s say the stablecoin drops from the target price of $1 to $0.75.

How is the USDC stablecoin backed?

The USDC stablecoin, for example, is backed by dollar-denominated assets of at least equal fair value to the USDC in circulation in segregated accounts with US regulated financial institutions. Such accounts are attested to (i.e. verified publicly) by an independent accounting firm.