Stablecoins are blockchain-based digital currencies pegged to the value of an underlying asset.

To maintain its peg, stablecoins are backed by reserves equal in value to the value of stablecoins outstanding.

For example, if the circulating supply of a stablecoin is $100 million, its reserve is equal to at least $100 million.

Owing to their peg, stablecoins are not subject to extreme price volatility, which has otherwise prevented mainstream adoption of applications built on top of cryptocurrency protocols.

There are broadly four approaches to stablecoins:

  1. Fiat collateralized
  2. Commodity collateralized
  3. Crypto collateralized
  4. Non-collateralized

The most commonly collateralized stablecoins are linked to fiat currencies such as the U.S. dollar (USD), euro (EUR), or British pound (GBP). Prominent coins include Tether (USDT) and USDC.

Stablecoins enter circulation by being created through a process known as “minting“.

If you have $1 and send that to a stablecoin issuer, you will mint 1 stablecoin.

When you wish to exchange your stablecoins back into fiat currency, you’ll be able to do so at a 1:1 value.