All About Stablecoins: Are They Really Stable?

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Stablecoins are cryptocurrencies whose values are tied to a fiat currency, most commonly the USD. Essentially, stablecoins assure that one unit of the cryptocurrency will maintain a value equivalent to 1 USD. Depending on the mechanisms by which the stability of its value is upheld, they can be broadly categorised into the following types:

• Fiat-Collateralized Stablecoins: These stablecoins are backed by a reserve of fiat currency at a 1:1 ratio, meaning for each stablecoin issued, a certain amount of fiat currency is held in reserve. Examples include Tether (USDT) — one of the largest fiat-collateral stablecoin which uses US dollars as its reserves; as well as USDC
• Crypto-Collateralized Stablecoins: Stablecoins that hold reserves in the form of other cryptocurrencies. Given that cryptocurrencies are inherently volatile, these stablecoins need to be overcollateralized so that they are able to maintain stability of value throughout the market cycles. An example is MakerDAO’s DAI stablecoin, which is pegged to the US dollar but has reserves of Ethereum; and sUSD (sUSD), which is issued by Synthetix, and backed by the Synthetix Network Token (SNX).
• Algorithmic Stablecoins: Unlike the other two stablecoins, algorithmic stablecoins don’t hold any type of reserve; instead, their value is kept stable through an algorithm…