A stablecoin is a type of cryptocurrency designed to maintain a stable value relative to the broader market. Unlike other cryptocurrencies, whose value can be highly volatile, stablecoins aim to have minimal fluctuation in their buying power.
- Store of Value: Money holds its value over time, allowing individuals to save and defer spending until a later date.
- Unit of Account: Money provides a standard numerical unit of measurement for the market value of goods, services, and other transactions.
- Medium of Exchange: Money acts as an intermediary in trade, facilitating transactions more efficiently than bartering.
-
Relative Stability - Pegged/Anchored vs. Floating
- Pegged Stablecoins: These stablecoins have their value tied to another asset, typically a fiat currency like the US dollar, to maintain stability.
- Floating Stablecoins: These stablecoins use mathematical formulas or other mechanisms to maintain consistent buying power, adjusting their value in response to market conditions.
-
Stability Method - Governed vs. Algorithmic
- Governed Stablecoins: Stability is maintained through human intervention by a central authority, which mints and burns tokens as needed to manage the supply.
- Algorithmic Stablecoins: These stablecoins rely on algorithms and smart contracts to automatically adjust the supply of tokens based on predefined rules, without human intervention.
-
Collateral Type - Endogenous vs. Exogenous
- Endogenous Stablecoins: These stablecoins are backed by collateral that originates from within the protocol itself, such as another cryptocurrency issued by the same platform.
- Exogenous Stablecoins: These stablecoins are backed by collateral from external sources, like fiat currencies, precious metals, or other cryptocurrencies not native to the issuing protocol.