What are stablecoins in cryptocurrency?

Stablecoins are cryptocurrencies pegged to “stable” physical assets, like commodities and fiat money. They are the solution to the needs of cryptocurrency users looking for a cryptocurrency equivalent to fiat money, like the US dollar. It had to be a digital currency that could dependably act as a store of value and enable them to transfer that value effectively. For example, USDT allows Ethereum investors to convert their Ethereum gains to a dollar-like value easily and later invest it back or elsewhere.

Stablecoins are tokens that are priced as close as possible to fiat currencies. They achieve this stability in a volatile cryptocurrency market by being pegged to the said currencies like the US dollar or EURO currency. It has become the most common asset for traders who want to store their profits in a stable currency without leaving the cryptocurrency space.

While some stablecoins are backed by fiat currency, others are backed by assets that keep their prices on a 1:1 level with fiat currency. Such assets include gold, cryptocurrencies, government bonds, and less reliable commercial papers. The issuer of these stablecoins holds these assets which enables them to issue stablecoins on-chain to the extent of their holdings. So if the issuer holds $1 million in gold, they can mint or issue $1 million in their stablecoin. For crypto-collateralized stablecoins holders usually deposit 150% of a cryptocurrency like Ethereum to mint the stablecoin such as DAI. If you deposit $200 in ETH, you can mint $50 in DAI.

There are other classes of stablecoins that are based on the old cash reserve mechanisms of central banks. These stablecoins use rebase mechanisms, and algorithms to secure the faith of users before going fully algorithmic, where the coin is like fiat but backed by nothing order than the trust of the people.