Stablecoins are cryptocurrencies whose value is pegged to an underlying asset like a currency or a commodity.
There are three methods for maintaining the value of a given stablecoin:
- 1.Crypto-collateralization involves enabling users to deposit cryptocurrency as collateral and mint a certain amount of stablecoins against the value of the collateral.
- 2.Fiat or commodity-backed collateralization is the same as crypto-collateralization but using deposits of fiat currency or commodities as collateral instead of cryptocurrency.
- 3.Fractional reserve systems can use fiat, crypto, or commodities as collateral and provide a system that enables an amount of stablecoins to be minted whose value exceeds that of the collateral deposited.