Stablecoin is a blockchain-based digital currency that is linked to the value of the underlying asset.
To maintain its peg, stablecoins are backed by reserves equal to the value of the issued stablecoins.
For example, if a stablecoin has a circulating supply of $100 million, its reserves will be at least equal to $100 million.
Due to its peg, stablecoins are not subject to extreme price fluctuations that would otherwise hinder mainstream adoption of applications built on top of cryptocurrency protocols.
There are roughly four methods of stablecoin:
- Fiat currency mortgage
- Commodity Mortgage
- Cryptocurrency Staking
- Unsecured
The most common collateralized stablecoins are pegged to fiat currencies such as the US dollar (USD), the euro (EUR), or the British pound (GBP). Notable coins include Tether (USDT) and USDC.
Stablecoins enter circulation through the process of “minting”.
If you have 1 USD and send it to a stablecoin issuer, you will mint 1 stablecoin.
When you wish to exchange stablecoins back to fiat currency, you can do so at a 1:1 rate.
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