Technical Foundations of Stablecoins
Stablecoins are digital assets designed to maintain a stable value against a specific reference, typically fiat currencies like USD. Their technical foundations can be categorized into three main types:
1. Fiat-Collateralized Stablecoins
These stablecoins are backed on a 1:1 basis by fiat reserves held in bank accounts. This means that for every stablecoin issued, there is an equivalent amount of fiat currency held in reserve. Examples include Tether (USDT) and USD Coin (USDC). Smart contracts are used for transparency, allowing users to verify the existence of the reserves.
2. Crypto-Collateralized Stablecoins
These stablecoins are backed by other cryptocurrencies, typically over-collateralized to account for price volatility. Platforms like MakerDAO utilize smart contracts to manage the collateralization ratio, allowing the stablecoin (such as DAI) to remain stable even when the collateral’s price fluctuates.
3. Algorithmic Stablecoins
Unlike the previous types, algorithmic stablecoins do not rely on collateral but use algorithms to control the supply of the token. By adjusting the supply based on demand, these coins aim to maintain their peg. Examples include TerraUSD (UST) and Ampleforth (AMPL), though they can be more susceptible to market manipulation and volatility.
Conclusion
The technical foundations of stablecoins play a critical role in their ability to function in the ever-evolving landscape of decentralized finance (DeFi), bridging the gap between traditional finance and cryptocurrencies.