Common sense of stablecoins: What is a stablecoin and how it works
Jul 07, 2025 pm 08:21 PM
Stablecoins are digital assets with stable value, designed to solve the problem of high volatility in traditional cryptocurrencies and achieve price stability by anchoring fiat currency, commodities or crypto assets. Its operating methods mainly include three categories: 1. Fiat currency collateralized stablecoins, which support value through equal fiat currency reserves, such as USDT and USDC; 2. Anonymous asset collateralized stablecoins, which are issued with over-collateralized crypto assets, such as DAI; 3. Algorithmic stablecoins, which rely on algorithms to adjust supply to maintain price stability, but rely on model effectiveness and market trust. Each type has its own advantages and disadvantages, and users need to choose according to their risk preferences and transparency requirements.
1. What is a stablecoin?
Stablecoins, as the name suggests, are digital assets designed to maintain relatively stable market value. Unlike cryptocurrencies with high volatility such as Bitcoin and Ethereum, stablecoins link their value to one or more stable assets through various mechanisms. These pegged assets are usually fiat currencies (such as US dollars, euros), commodities (such as gold), or other crypto assets.
For example, a common stablecoin with the goal of always keeping a 1:1 exchange rate pegged to the dollar. This means that no matter how the market fluctuates, a stablecoin such as this should be equivalent to one dollar. This stability makes it play an important role in digital asset transactions, cross-border payments, and decentralized finance (DeFi) applications because it reduces the risks brought by price volatility and makes digital asset-based business activities more predictable.
2. Official website of the global mainstream stablecoin trading platform
- Binance Binance: ()
- Ouyi OKX: ()
- Huobi: ()
- Gate.io Sesame Opening: ( )
3. How does stablecoins work?
The operating methods of stablecoins are mainly divided into several major categories, each with its own unique design concept and risk management mechanism:
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Fiat currency collateralized stablecoin: This is the most common type, and its value is supported by an equal amount of fiat currency reserves. For example, the issuer of a stablecoin will reserve one dollar in a traditional financial institution to support each issued stablecoin. Users can exchange stablecoins for the corresponding fiat currency at any time, and vice versa. This type of stablecoins usually requires regular audits to prove the authenticity and adequacy of their reserves.
For example: USDT (Tether), its official website is https://tether.to/; USDC (USD Coin), published by Centre Consortium, its official website is https://www.centre.io/.
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Crypto Asset Collateral Stable Coins: These stablecoins are issued as collateral by other crypto assets (such as Ethereum). To cope with the volatility of crypto asset prices, an over-collateralization method is usually adopted, that is, the value of the collateral is much higher than the value of the issued stablecoin. When the collateral value falls to a certain level, the system will automatically trigger a liquidation mechanism to maintain the anchorage of the stablecoin.
For example: DAI, released by the MakerDAO project, you can learn more on its main platform https://makerdao.com/.
Algorithmic Stablecoins: This type of stablecoins does not rely on the direct collateral of traditional assets or crypto assets, but dynamically adjusts supply through complex algorithms and smart contracts to maintain price stability. When the price of a stablecoin is higher than the anchor target, the algorithm increases the supply; when the price is lower than the anchor target, the algorithm decreases the supply. The risk of this model is relatively high because its stability is highly dependent on the effectiveness of the algorithmic model and the market's trust in the model.
Each operation mode has its advantages and disadvantages. When choosing and using stablecoins, users need to conduct in-depth understanding and evaluation based on their own risk tolerance and requirements for project transparency.
The above is the detailed content of Common sense of stablecoins: What is a stablecoin and how it works. For more information, please follow other related articles on the PHP Chinese website!
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