Stablecoins are digital currencies backed by other assets to reduce volatility. Cryptocurrencies are very volatile, so stablecoins were created to solve this problem.
Stablecoins’ type depends on the asset they’re anchored. Usually, it’s fiat currencies, cryptocurrencies, or algorithms.
This is the most popular type of stablecoins. They are usually anchored to real currencies in a 1:1 ratio. The central issuer keeps a certain amount in reserve currency and issues a proportional amount of cryptocurrency. In this case, the user can exchange cryptocurrency for fiat at any time. Not all traders like stablecoins, because users need to trust the issuer and cannot check whether the reserve fund is supported or not.
These coins are provided by other cryptocurrencies. To get such a stablecoin, you need to block the required amount of cryptocurrency in the contract, which will issue a certain number of new coins. For the reverse exchange, the stablecoin is sent to the same contract, and the cryptocurrency that provided it is returned to the user, taking into account commissions and interest rates.
These stablecoins are not tied to fiat or other cryptocurrencies. Their stability is ensured by smart contracts and algorithms that govern the issuance of new tokens. This is similar to how a central bank manages fiat currency. The algorithm adjusts the number of tokens issued, depending on the course.
Traditional cryptocurrencies are often used not only as a payment for a product or service, but also as an investment tool. Traders are attracted by the opportunity to make money on the rate races. But stablecoins can’t provide this feature. Usually, stablecoins are used to fix the balance. The most popular stablecoins today are Tether (USDT), True USD (TUSD), Paxos Standard (PAX) and USD Coin (USDC).
The main advantage of stablecoins is their stable rate. Most cryptocurrencies are not used in everyday life due to their volatility. Stablecoins solve this problem and provide additional opportunities to fix the balance.
The main cons is lack of full decentralization because of anchoring to the different assets. This causes criticism from part of the community.