Stablecoins: how they try to stay at one dollar
Fiat-backed, crypto-backed and algorithmic stablecoins use very different methods to hold a peg. The differences matter.
A stablecoin is a token designed to keep a steady value, usually one US dollar. They are widely used to move value between exchanges and to park funds without leaving the crypto ecosystem.
Fiat-backed stablecoins are issued by a company that says it holds reserves, such as cash and short-term government bonds, for every token in circulation. Their reliability depends on the quality of those reserves and on how transparently they are reported.
Crypto-backed stablecoins lock up other cryptocurrencies as collateral, usually more than the value of the stablecoins issued. If the collateral falls too far, positions are liquidated automatically to protect the peg.
Algorithmic designs try to hold the peg mainly through supply adjustments and incentives. Some of these designs have failed sharply in the past, which is why it is worth understanding what stands behind any stablecoin before relying on it.