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Glossary

Stablecoin

A stablecoin is a type of cryptocurrency designed to maintain a stable value by being pegged to a fiat currency, commodity, or algorithmic mechanism. Unlike volatile cryptocurrencies such as Bitcoin (BTC) or Ethereum (ETH), stablecoins offer price stability, making them suitable for payments, remittances, DeFi transactions, and as a store of value.

Stablecoins are widely used in decentralized finance (DeFi), cross-border payments, and crypto trading, acting as a bridge between traditional finance and blockchain-based assets.

Types of Stablecoins

Stablecoins maintain price stability through different mechanisms:

Fiat-Collateralized Stablecoins

  • Backed 1:1 by fiat currency reserves (e.g., USD, EUR).
  • Issuers hold equivalent fiat reserves in banks or treasuries to support token supply.
  • Examples:
    • USDT (Tether) – Backed by a mix of cash, U.S. treasuries, and other financial assets.
    • USDC (USD Coin) – Issued by Circle, backed 1:1 by USD reserves and regularly audited.
    • BUSD (Binance USD) – A now phased-out stablecoin, previously issued by Binance and regulated by Paxos until U.S. regulatory intervention in 2023.

Crypto-Collateralized Stablecoins

  • Backed by overcollateralized crypto assets instead of fiat reserves.
  • Users deposit ETH, BTC, or other assets as collateral to mint stablecoins.
  • Examples:
    • DAI (MakerDAO) – Overcollateralized with ETH and other assets, governed by a decentralized protocol.
    • sUSD (Synthetix USD) – Backed by SNX tokens within the Synthetix ecosystem.

Algorithmic Stablecoins

  • Maintains stability through algorithmic supply adjustments and incentives, without traditional collateral.
  • Risk of de-pegging if market conditions fail to sustain the algorithm.
  • Examples:
    • UST (TerraUSD) (Collapsed in 2022) – Used an algorithmic peg with LUNA but collapsed due to a death spiral.
    • FRAX (Frax Finance) – A hybrid model combining algorithmic mechanisms with collateralized stability.

Commodity-Backed Stablecoins

  • Pegged to real-world assets like gold, silver, or oil.
  • Backed by reserves stored by issuers, redeemable for the underlying commodity.
  • Examples:
    • PAXG (Paxos Gold) – Pegged to physical gold reserves.
    • XAUT (Tether Gold) – Represents gold bars stored in secure vaults.

How Stablecoins Work

  1. Issuance – Users deposit fiat, crypto, or collateral to receive stablecoins in return.
  2. Stability Mechanism – Pegging methods (fiat reserves, overcollateralization, or algorithmic control) maintain the stable value.
  3. Redemption – Stablecoin holders can redeem their tokens for underlying assets or fiat equivalents.
  4. Circulation & Use Cases – Stablecoins are widely used in DeFi, payments, trading, and lending.

Key Features

  • Price Stability – Designed to remain pegged to a reference asset (e.g., USD, gold).
  • Liquidity – Used in DeFi, centralized exchanges (CEXs), and cross-border payments.
  • Transparency & Audits – Regulated stablecoins (e.g., USDC) undergo regular reserve audits.
  • Interoperability – Available across Ethereum, Solana, Binance Smart Chain, and other blockchains.

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