Stablecoins are cryptocurrencies designed to hold a stable value, most commonly pegged to the US dollar. They are widely used for trading, payments, and moving value across exchanges without exposure to the price swings typical of assets like Bitcoin or Ethereum.
Fiat-backed stablecoins, such as USDT and USDC, are the most common type. Each token is intended to be backed by reserves — cash and cash-equivalent assets — held by the issuing company, which publishes periodic attestations of those reserves.
Crypto-collateralized stablecoins, such as DAI, take a different approach: users lock up other cryptocurrencies as collateral in a smart contract to mint the stablecoin. Because the collateral itself can be volatile, these systems typically require over-collateralization and automated liquidation mechanisms to stay solvent.
Algorithmic stablecoins attempt to maintain their peg through supply-and-demand mechanisms encoded in smart contracts, without direct asset backing. This design has proven the most fragile in practice, and several algorithmic stablecoins have lost their peg dramatically in the past.
Whichever design is used, a stablecoin's real-world reliability depends on the quality and transparency of what actually backs it — not just the promise of a stable price printed on the token itself.
