Stablecoins are a type of cryptocurrency designed to maintain a stable value by pegging them to a reserve of assets, typically fiat currencies like the US dollar or commodities like gold. The primary aim of stablecoins is to mitigate the volatility commonly associated with cryptocurrencies, making them more suitable for transactions, savings, and as a medium of exchange.
There are generally three main types of stablecoins:
1. **Fiat-collateralized stablecoins**: These are backed 1:1 by fiat currency held in reserve. For example, for every stablecoin issued, an equivalent amount of fiat is stored, ensuring its value stability.
2. **Crypto-collateralized stablecoins**: These are backed by other cryptocurrencies, which are held in smart contracts. They are over-collateralized to account for price fluctuations in the collateral assets.
3. **Algorithmic stablecoins**: These do not use collateral but instead rely on algorithms and smart contracts to control the supply of the coin, increasing or decreasing it based on demand to maintain price stability.
Stablecoins aim to combine the benefits of cryptocurrencies (like fast, borderless transactions) with the stability of traditional currencies, making them attractive for users and investors.
Stablecoins have become the preferred currency for illicit transactions, accounting for 63% of such activities due to their stable value compared to Bitcoin. An increase in stablecoin use by 77%…