Stablecoins - are cryptocurrencies, the main purpose of which is to reducing price volatility. It is the latter that is often cited as the main reason why many organizations and private investors are in no hurry to get into the spirit of the cryptocurrency sphere. The stablecoin industry has been created and is being developed precisely with the aim of solving this problem.
In addition to the main benefits outlined above, stablecoins can act as an alternative store of value or measure of value.
At the moment, the total number of active projects that are creating stablecoins is one of the largest in categories across the crypto assets, the potential value of which is estimated at trillions of dollars. It is widely believed that it is stablecoins that can become the very "missing link" that would contribute to a much wider application and use of cryptoassets.
The price of the first cryptocurrency (bitcoin) is determined by the market, volatile supply and demand for it. Stablecoins are designed as anti-volatile instruments that replicate or copy the behavior of so-called "stable" currencies such as the US dollar, euro, yen or Swiss franc. It should be added that these cryptocurrencies can be tied not only to national currencies, but also to any other goods, for example, gold or oil.
Volatility is also an important factor holding back the proper development of the debt and credit markets within the cryptocurrency space. In certain jurisdictions, the exchange of cryptocurrency for national currency can also lead to a tax liability, which, for obvious reasons, users would like to avoid or minimize.
A large number of different technical approaches to the very mechanics of stablecoins have been developed and implemented. In general, they can be divided into two main groups: "asset-backed" and "algorithmic".
An asset-backed stablecoin is when an asset, such as the US dollar, is often held in reserves to support the exchange rate of a stablecoin. USDT and USDC are the most famous examples of such a technical device based on fiat currencies, and Maker Dai is the largest stablecoin backed by cryptoassets.
Thus, a stablecoin can be backed by fiat currencies (one or more), physical assets (gold), or one or more cryptocurrencies.
Issuers of classic stablecoins pegged to the US dollar declare their backing in real dollars in a bank account or a package of government bonds in a 1: 1 ratio. It is believed that 1 token is almost always worth 1 dollar, its price rarely deviates by more than tenths of a percent. But the real security of such stablecoins is not always possible to verify, you have to trust the issuer's reporting - a cryptocurrency company, often registered offshore.
Algorithmic stablecoins run on top of the public blockchain backed by its underlying cryptocurrency - for example, DAI over ETH, sUSD over SNX, or USDN over WAVES. It is worth noting that the very mechanics of issuing and securing stemcoins are slightly different.
With the help of price regulation algorithms, a stable crypto asset is created, but without the participation of fiat currencies, which in itself is very valuable, since there is no need for communication with the traditional financial system. Algorithmic stablecoins work like cryptocurrencies. Unlike “asset-backed” stablecoins, they are decentralized and not subject to a single issuer and regulators.
Algorithmic stablecoins are widely used within the DeFi industry, but have yet to expand beyond it. They have yet to find application in real economic transactions.