A stablecoin is a type of cryptocurrency designed to maintain a consistent value by pegging its price to a stable asset such as the U.S. dollar, euro, or gold. Its purpose is to reduce the volatility common in other cryptocurrencies, allowing it to function more reliably as a medium of exchange or store of value.
There are three main types of stablecoins:
Fiat-Backed: Supported by reserves of traditional currency held by a custodian (e.g., USDC, USDT).
Crypto-Backed: Collateralized by other cryptocurrencies, often over-collateralized to absorb price swings (e.g., DAI).
Algorithmic: Maintains its peg through smart contract algorithms that expand or contract supply in response to market conditions.
Stablecoins play a vital role in decentralized finance (DeFi), enabling trading, lending, and liquidity operations without exposure to extreme price volatility.