Stablecoin

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A stablecoin is a type of cryptocurrency designed to maintain a stable value relative to a specific asset or a basket of assets. Unlike highly volatile cryptocurrencies like Bitcoin or Ether, stablecoins aim to minimize price fluctuations, making them more suitable for everyday transactions, as a store of value, or as a bridge between fiat currencies and the broader crypto ecosystem.

There are several types of stablecoins, primarily categorized by their underlying collateral mechanism:

  1. Fiat-collateralized: These are backed by reserves of a fiat currency (e.g., USD, EUR) held by a central custodian. For every stablecoin issued, there’s an equivalent amount of fiat currency in reserve.
  2. Crypto-collateralized: These are backed by other cryptocurrencies. To account for the volatility of the collateral, these stablecoins are often over-collateralized, meaning more crypto assets are locked up than the value of the stablecoins issued.
  3. Algorithmic: These are not backed by any direct collateral but instead use algorithms and smart contracts to manage the token supply, automatically increasing or decreasing it to keep the price stable.
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