Stablecoins
Learn about Cryptocurrencies Built for Stability
A stablecoin is a type of cryptocurrency that is most often backed by an underlying asset.
While digital assets like Bitcoin and Ether succeed as currencies on a number of levels, they are not ideal as a medium of exchange due to their volatility.
Stablecoins combine the censorship-resistance of cryptocurrencies like Bitcoin and Ether with the familiarity and ease-of-use associated with stable fiat currencies.
Why Stability Matters
Stablecoins make cryptocurrency more accessible to the average person. They allow decentralized exchanges (exchanges without a trusted intermediary, where users always maintain full custody of their funds) to denominate trading pairs in U.S. dollars instead of Bitcoin or Ether.
Volatility in the spot price of digital assets like Bitcoin and Ethereum make it difficult, if not impossible, to use certain applications of distributed ledger technology.
When using Bitcoin to send a remittance from one country to another, for example, the price movement during a single block confirmation (how long it takes the blockchain to include a transaction) may be higher than any fees charged by payment processors like Western Union or PayPal.
Operating a business with thin margins, for example, can be nearly impossible when the underlying currency is so volatile.
Unlike Bitcoin and Ether, the value of a stablecoin is pegged to an underlying asset like the US Dollar. The goal of stablecoin is to maintain a stable value relative to its underlying asset.
Types of Stablecoins
Stablecoins can be categorized by their underlying collateral and how much collateral the system requires.
Hypothetically, any asset of value can be used as collateral. Most stablecoins currently fall into one of three categories:
Asset-Backed
Fiat-Backed
Cryptocurrency-Backed
Stablecoins May Also be:
Over-Collateralized
These systems require a deposit of greater value than the stablecoins minted by the protocol.
Fully-Collateralized
These systems require a deposit equal of equal value to the stablecoins minted by the protocol.
Under-Collateralized
These systems operate on fractional reserves and allow deposits holding less value than the stablecoins minted by the protocol.
Non-Collateralized
These systems use algorithms that increase or decrease the amount of tokens in circulation to affect monetary policy and maintain a stable value.
Dai
Dai is a stablecoin from Maker whose value is pegged to the U.S. Dollar.