Stablecoins work by using various mechanisms to ensure their value remains stable, often pegged to a currency like the US dollar. They can be backed by reserves of the asset they are pegged to (fiat-collateralized), algorithmically controlled to adjust supply (algorithmic), or backed by other cryptocurrencies (crypto-collateralized). This stability makes them suitable for transactions, trading, and as a store of value, contrasting with the high volatility often seen in traditional cryptocurrencies like Bitcoin.
Stablecoin Example
An example of a stablecoin is Tether (USDT), which is pegged to the US dollar at a 1:1 ratio, allowing users to transact with it while avoiding the price fluctuations commonly associated with other cryptocurrencies.