Stablecoins

Stablecoins are a class of cryptocurrency designed to minimize price volatility by maintaining a stable value relative to a reference asset, typically a fiat currency such as the United States dollar. They are used to facilitate trading, payments, and on-chain activity within crypto ecosystems, offering a predictable medium of exchange and unit of account.

Design approaches are broadly categorized as fiat-collateralized, crypto-collateralized, and algorithmic. Fiat-collateralized stablecoins hold reserves of the pegged asset or other high-quality assets and issue tokens in a like-for-like amount, with redemptions enabling cash-like redemption. Crypto-collateralized stablecoins use over-collateralization and smart contracts to absorb price shocks and liquidate collateral if necessary. Algorithmic stablecoins attempt to maintain the peg through rules that expand or contract supply in response to price deviations, without necessarily holding large reserves.

Examples include fiat-backed tokens such as Tether's USDT and USD Coin (USDC); crypto-backed tokens such as DAI; and algorithmic projects such as FRAX and others that deploy governance-driven mechanisms to preserve the peg. Each design involves trade-offs among efficiency, transparency, and risk of de-pegging under stress.

Use cases include as a means of payments, a stable unit of account in DeFi trading pools, and a conduit for cross-border transfers. They serve as proxies for fiat within blockchain networks and can simplify liquidity provisioning across platforms.

Risks and considerations include reserve transparency, over-collateralization levels, liquidity for redemptions, regulatory scrutiny, and the potential for de-pegging during market stress. The regulatory environment is evolving, with authorities examining reserves, disclosures, and consumer protections. The relationship between stablecoins and broader financial policy also shapes their development.