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Stablecoins are cryptocurrencies that, by definition, must always represent the same value.
Thus, a stablecoin is a cryptocurrency that has the value of a fiat currency, such as the US dollar. There are various ways to maintain a stable value of a stablecoin.
Fiat currency collateral: For each cryptocurrency coin, fiat currency is backed by real currency. This means that the stablecoin is backed 1:1 by the underlying fiat currency.
Backed by Other Assets: Another possibility is that the stablecoin is backed by other assets designed to keep the value of the coin stable. A stablecoin can reflect the value of an ounce of gold or bitcoin and be backed by that asset.
Algorithmic stablecoins: Here, the value of the stablecoin is backed by an algorithm. However, there are no major stablecoins that have successfully implemented this yet. The biggest algorithmic stablecoin was TerraUSD, and it failed with the start of the 2022 crypto winter.
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