stablecoin

Stablecoins are a class of digital assets designed to minimize price volatility by pegging their value to a reference asset, typically a fiat currency such as the US dollar. The goal is to combine the benefits of cryptocurrencies—transferability, programmable economics, and on-chain settlement—with price stability suitable for payments, remittances, and as a unit of account in decentralized finance.

Fiat-collateralized stablecoins hold reserves of fiat currency or equivalents that back each token at a fixed 1:1 ratio. They rely on trusted custodians and regular audits to demonstrate reserves. Examples include Tether's USDT and Circle's USD Coin (USDC).

Crypto-collateralized stablecoins use other cryptocurrencies as collateral, typically with over-collateralization and automated liquidations via smart contracts. The Dai stablecoin issued by the MakerDAO system is a prominent example. This model aims to avoid fiat reserves but introduces risk from collateral volatility and contract failures.

Algorithmic or non-collateralized stablecoins attempt to maintain the peg through algorithmic supply adjustments and incentives rather than reserves. They are sensitive to market conditions and have experienced significant peg breaks, with TerraUSD (UST) being a notable and widely cited failure in 2022.

Governance, transparency, and regulation: Many stablecoins publish attestations or audits of reserves, but procedures and frequencies vary. Regulators have scrutinized stablecoins as potential payment systems and bank-like liabilities, focusing on reserve adequacy, disclosure, custody, and consumer protection.

Uses and criticisms: Stablecoins facilitate on-chain trading, lending, and payments while seeking to reduce volatility. Critics point to reserve risk, centralized control, potential for runs, and regulatory uncertainty. The ecosystem continues to evolve with a mix of centralized and decentralized approaches.