Stablecoins are digital assets whose value is linked to the value of another money, commodity, or financial instrument. Stablecoins are designed to be an alternative to the excessive volatility of the most popular cryptocurrencies, such as Bitcoin (BTC), which has made such investments unsuitable for widespread use in transactions. Stablecoins are cryptocurrencies that try to tie their market value to something outside of themselves. As a medium of exchange, stablecoins are more helpful than more volatile cryptocurrencies. Stablecoins can be linked to a currency like the US dollar or a commodity price like gold. Stablecoins aim for price stability by using reserve assets as security or supply-controlling computational formulae. Stablecoins come in a variety of shapes and sizes.

Given the widespread availability and acceptability of the US dollar, some believe that stablecoins are a problem in search of a solution. Many cryptocurrency supporters, on the other hand, feel that digital currency that is not regulated by central banks is the way of the future. Stablecoins are classified into three categories based on the mechanism that keeps their value stable.


1. Stablecoins with Fiat Collateral

Fiat-collateralized stablecoins keep a reserve of a fiat currency (or currencies) as collateral, such as the US dollar, to ensure the stablecoin's value. Precious metals like gold and silver, as well as commodities like crude oil, can be used as collateral, however most fiat-collateralized stablecoins have reserves of US dollars.

Independent custodians manage these reserves, which are audited regularly. affix a tether (USDT).

2. Stablecoins with Crypto-Collateral

Stablecoins that are crypto-collateralized are backed by other cryptocurrencies. Because the reserve cryptocurrency may be volatile, such stablecoins are over-collateralized, meaning that the value of the cryptocurrency held in reserves exceeds the value of the stable coins produced.

A $2 million cryptocurrency might be maintained as a reserve to issue $1 million in a crypto-backed stablecoin, guaranteeing against a 50% drop in the reserve cryptocurrency's price. MakerDAO's Dai (DAI) stablecoin, for example, is pegged to the US dollar but backed by Ethereum (ETH) and other cryptocurrencies worth 150 percent of DAI in circulation.

3. Stablecoins using Algorithms

Reserve assets may or may not be held by algorithmic stablecoins. The technique of keeping the stablecoin's value stable by restricting its supply through an algorithm, which is effectively a computer software running a predefined calculation, is the main difference.

In some aspects, this is similar to central banks, which do not use a reserve asset to maintain the value of the currency they issue. The difference is that a central bank like the Federal Reserve sets monetary policy publicly based on well-understood parameters, and it's status as the issuer of legal tender does wonder for the credibility of that policy.

Algorithmic stablecoin issuers can't fall back on such advantages in a crisis. 

4. Regulated Stablecoins

Given the rapid expansion of the $130 billion industry and its potential to disrupt the broader financial system, regulators continue to scrutinize stable coins.

Stablecoins should be regulated as financial market infrastructure alongside payment systems and clearinghouses, according to the International Organization of Securities Commissions (IOSCO) in October 2021. The proposed restrictions target stablecoins that regulators consider being systemically important, as well as those that have the potential to disrupt payment and settlement processes.

Furthermore, legislators have stepped up calls for more stringent regulation of stablecoins. Senator Cynthia Lummis (R-Wyoming) advocated for regular audits of stable coin issuers in September 2021, while others support bank-like rules for the sector. 

Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is extremely dangerous and speculative, and this page is not intended to be a guide to doing so.


Bitcoin, Ethereum, and Ripple are among the most volatile cryptocurrencies. High price volatility is the defining feature of an unstable coin. Bitcoin, Ethereum, Ripple, and many other cryptocurrencies are difficult to utilize for ordinary business, trade, and transactions between customers and merchants due to their extreme price volatility. Furthermore, many of these cryptocurrencies have been recognized as an asset class rather than a medium of exchange, and have even been officially categorized as such. These coins are the subject of a lot of speculation. Regulation has yet to be created, and the distinction between assets and securities is not always clear. The latter has tax and regulatory ramifications, such as the registration of securities as SECs.