Stablecoins are a type of cryptocurrency. Cryptocurrency is a collection of data that functions as a medium of exchange, and as an alternative to state-issued currencies such as the U.S. dollar. The records of who owns each crypto ‘coin’ are stored in a digital ledger, typically a blockchain. Because cryptocurrency is decentralized, meaning it is not issued by a central authority such as a government’s treasury, many users see the currency as working to promote greater financial democracy.
A stablecoin is a cryptocurrency that has its value pegged to another currency, such as a fiat currency like the U.S. dollar. For example, the USD Coin cryptocurrency (ticker USDC) strives to keep its value close to one U.S. dollar. The value of some stablecoins is even pegged to other cryptocurrencies. The benefit of stablecoins’ predictable value makes them more appealing for consumers looking to use cryptocurrency as a source of payment.
Generally, the entity behind a stablecoin creates a reserve that holds the asset, or group of assets, that back the stablecoin. Thus, a dollar-backed stablecoin may hold $1 million in reserve to back up one million stablecoin units. Most other cryptocurrencies are not backed by any currency or other asset.
The supply of stablecoins is growing rapidly — rising to nearly $150 billion as of January 2022, compared with just $35 billion a year earlier, according to The Block website.