What Stablecoin Is
A stablecoin is cryptocurrency with stable prices.
It is pegged to another stable assets such as gold or U.S dollar in order to minimize volatility. For instance, because Tether(USDT) is pegged to the U.S dollar, it is traded for $1 USD, which is a blockchain based asset.
Functions of Stablecoin
There are three functions of stablecoin:
- Medium of exchange: the ability to trade goods and services without bartering
- Store of value: means of maintaining wealth over time
- Unit of account: measurement unit to define and compare market values
How Stablecoin Works
Stablecoin holds collateral of some type and manages the supply to help incentivize the market to trade the coin for no more or less than $1. For Tether or TrueUSD, the concept is to hold actual dollars in reserve that are redeemable for the token. For others, like Dai, they hold crypto assets in reserve and have a lending system.
