• Harsha M


Stablecoins are a type of cryptocurrency linked to an asset like the USD, AUD, Gold, Real Estate, etc, that doesn’t change much in value. There is ~ $130 billion worth of stablecoins in rotation.

Fiat backed stablecoins -> These are stable coins created on a blockchain such as Ethereum, and Solana are backed by Fiat deposits in the traditional banks. Ex: USDC, USDT etc.

Algorithmic stabelcoins -> An algorithmic stablecoin is one that can keep its peg using only software and rules. These software have to expand/compress functions coded in. Ex: Ampleforth, FEI, etc.

Crypto-backed stablecoins-> Not so stable as the underlying asset itself is fluctuating. These are usually centrally managed. Ex: Dai, Bitshares, etc.

Commodities backed stablecoins -> These are backed and pegged to commodities values such as Gold. Ex: Paxos PAX Gold etc.

Why do stablecoins matter?

Originally, stablecoins were primarily used to buy other cryptocurrencies, like bitcoin, because many cryptocurrency exchanges didn’t have access to traditional banking. They are more useful than country-issued currencies because you can use them 24 hours a day, seven days a week, anywhere in the world – without relying on banks. Money transfers take seconds to complete.

Another useful feature of stablecoins is that they can work with so-called smart contracts on blockchains, which, unlike conventional contracts, require no legal authority to be executed. The code in the software automatically dictates the terms of the agreement and how and when money will be transferred. This makes stablecoins programmable in ways that dollars can’t be.

Smart contracts have given rise to the use of stablecoins not only in seamless trading but also in lending, payments, insurance, prediction markets, and decentralized autonomous organizations – businesses that operate with limited human intervention.

Collectively, these software-based financial services are known as decentralized finance or DeFi.

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