Stablecoins are a new type of cryptocurrency with price stability, fixed value, and backed by reserve assets. In general, most cryptocurrencies are volatile because they are decentralized, not affiliated with any government or organization, and prices depend on supply and demand in the market. In contrast, in order to achieve the security and privacy of cryptocurrency payments and stable valuations without volatility, stablecoins are usually endorsed by fiat currencies, commodities, or maintained stable through algorithms.

How many stablecoins are there?

Fiat-collateralized stablecoins: They are off-chain assets, backed 1:1 by fiat currency. They can be traded on exchanges and redeemable from the issuer. Some examples of fiat-collateralized stablecoins: TrueUSD (TUSD), USD Tether (USDT), USD Coin.

2. Commodity-collateralized stablecoins: They are off-chain assets backed by commodities like oil and gold. They can be redeemed on demand (more or less). However, they are more vulnerable to price movements due to changes in commodity prices. Some examples of commodity-backed stablecoins: Tether Gold and Paxos Gold.

3. Crypto-collateralized stablecoins: They are collateralized by another cryptocurrency or a portfolio of cryptocurrencies. To achieve price stability, complementary tools and incentives are introduced, not just collateral. They are regulated on-chain and use smart contracts. Haven and DAI are examples of cryptocurrency-collateralized stablecoins.

4. Algorithmic stablecoins: They are uncollateralized on-chain stablecoins that do not have any reserves, but use a working mechanism to maintain a stable price, similar to how central banks print and burn money. TerraUSD , AMPL are algorithmic stablecoins.

How do stablecoins work?

Off-chain collateralized assets, such as Tether, require a custodian to oversee the currency and then reserve a certain amount of collateral. Tether Ltd. holds USD in bank accounts in an amount equal to the USDT they issue to maintain order in the system. In this way, price fluctuations are prevented. If someone owns digital dollars and asks for cashback, the holder will get physical dollars and the corresponding stablecoins will be destroyed.

On-chain collateralized assets, such as DAI, are backed by cryptocurrencies. Due to the instability of reserve cryptocurrencies, a 1:1 guarantee cannot be guaranteed. So the value of the collateralized cryptocurrency should exceed the value of the tokens issued. Take DAI as an example, it is generated by smart contracts, and the interest rate can be adjusted flexibly. In order to maintain a 1:1 relationship between DAI and USD, MakerDAO controls the acceptable collateral types, collateral rates, and interest rates for borrowing or storing Dai, and they can then control the amount of Dai in circulation, and thus its value.

Some algorithmic stablecoins are "rebasing" coins such as Ampleforth (AMPL), TerraUSD. They adjust the supply based on the market price of the stablecoin. If the stablecoin trades above $1.05 or below $0.95, new tokens are issued to the holder (if the price is above $1.05) or burned from the holder (if the price is below $0.95) to convert the price Reset back to $1. This effectively shifts volatility from price to market cap: market cap does not change as demand for rebase tokens changes. Algorithmic stablecoins not only achieve decentralization, but also require no collateral assets.

What is the best stablecoin?

Tether (USDT) will be number one by market cap, with a market cap of over $60 billion. It was the first USD-backed regulated stablecoin launched in 2018. Tether (USDT) is a peer-to-peer blockchain and open-source cryptocurrency. It is one of the popular stablecoins and is also very helpful for transactions that often have difficulty converting currencies into dollars. Other stablecoins like True USD (TUSD), DAI, PAX, GUSD are also popular, each with a market cap of over $100 million.

How to use stablecoins?

In theory, one of the main ways to use stablecoins is to make fast, cheap payments or remittances around the world. Stablecoins provide a fast way to transfer deposits or withdrawals between fiat currencies to cryptocurrency exchanges, and it is also a simple payment process that allows businesses to send money to employees easily and securely. However, options for direct purchases of goods and products using stablecoins may be limited. Many people use stablecoins to buy cryptocurrencies on cryptocurrency exchanges because it is not easy to move cash in and out of the cryptocurrency market. It is basically a necessary "tool" for investing in other cryptocurrencies. When cryptocurrency users see volatility in the cryptocurrency market, they can move funds to stablecoins and wait for the market to stabilize.