While Bitcoin became known for its volatility, another type of crypto asset was created precisely to solve that problem: stablecoins.
What a stablecoin is
It is a crypto asset designed to keep its value pegged to a stable reference, usually a currency such as the US dollar. The idea is to combine the technological convenience of cryptocurrencies (fast transfers, use across different platforms) with a price that does not swing as much as Bitcoin’s.
How stability is maintained
- Backed by reserves: the issuer holds reserves in traditional currency or securities equivalent to the amount issued in stablecoins.
- Backed by other crypto assets: they use other cryptocurrencies as collateral, usually worth more than the amount issued, to absorb price swings.
- Algorithmic: they try to maintain the peg through automatic supply-and-demand mechanisms, a model that has already shown significant failures in the past.
What they are typically used for
Stablecoins are widely used as a temporary “safe haven” within cryptocurrency exchanges, for international transfers and as a unit of reference in decentralized finance (DeFi) contracts and protocols.
Not every stablecoin is equally safe — the quality and transparency of the reserves backing each one vary considerably from issuer to issuer.
This content is for educational purposes only and does not constitute an investment recommendation.