Stablecoin

A stablecoin is a cryptocurrency whose value is pegged to an external reference, most commonly the US dollar at a 1:1 ratio. Stablecoins solve crypto's volatility problem, enabling payments, savings, and DeFi participation without exposure to price swings.

Types of Stablecoins:

Fiat-Backed (Centralized): - Backed 1:1 by reserves held in bank accounts - USDT (Tether): $110B+ market cap, most traded crypto by volume - USDC (Circle): $30B+, fully regulated and audited - Risk: Counterparty risk, regulatory action, bank failure

Crypto-Backed (Decentralized): - Over-collateralized with cryptocurrency - DAI (MakerDAO): Backed by ETH, USDC, and other assets at 150%+ collateral ratio - Risk: Collateral value dropping below backing threshold

Algorithmic: - Use smart contracts to expand/contract supply to maintain peg - FRAX: Partially algorithmic, partially collateralized - Risk: Death spiral if confidence is lost (see Terra/UST collapse)

Stablecoin Market Overview:

Use Cases: - Safe haven during market volatility - Cross-border payments and remittances - DeFi lending and yield generation - Trading pair base currency - Payroll and business payments

Regulatory Landscape: Stablecoins face increasing regulatory attention worldwide. The EU's MiCA regulation and proposed US legislation aim to require full reserves, regular audits, and licensing for stablecoin issuers.

The Terra/UST Collapse: In May 2022, the algorithmic stablecoin UST lost its peg and collapsed to near zero, wiping out $40B in value. This event highlighted the risks of under-collateralized stablecoins and accelerated regulatory efforts.