Explainblockchain

💵 Cryptocurrencies are very easy to exchange, but fluctuations in their value have made them risky for making payments as by the time the transaction is completed, the value of the sent coins can differ significantly from the original one.
⠀
🥇 A stablecoin is a cryptocurrency which value is tied to the underlying asset. Such an underlying asset can be, for example, a fiat currency, more often in its case it is the US dollar.
⠀
🥇Stablecoin is an asset that offers the crypto world the characteristics of price stability and acts as a reliable safe haven asset against the backdrop of unstable markets.
⠀
❓How do stablecoins work?
⠀
1️⃣The most popular type of stablecoin is the one that is directly linked to the fiat currency in the ratio of 1: 1. We also call this a fiat-backed stablecoin.
⠀
The central issuer (or bank) stores a certain amount in the reserve currency and issues a proportional number of tokens.
⠀
For example, an issuer can have one million dollars and distribute it one dollar for each of the million tokens. Due to this, users can exchange their cryptocurrencies for tokens at any time, the value of which is equivalent to the US dollar.
⠀
2️⃣Crypto-backed stablecoinos differ only in that the cryptocurrency is used as collateral instead of fiat money. However, due to the fact that any cryptocurrency is digital, only smart contracts process the issue of units.
⠀
In order to get this type of stablecoin, users lock the necessary cryptocurrency in a contract, which then issues a certain number of requested coins. In the future, to return the deposit, users send stablecoins to the same contract for reverse exchange.

3️⃣ Algorithmic stablecoins.
Their stability is achieved by algorithms and smart contracts that manage the delivery of the token issue. This species is not fully understood and will take time to mature this technology.

⚙️The specific mechanisms of operation of stablecoins, which provide a link to another asset, vary depending on the design of each of the systems.
⠀
⚖️It would be enough to say that the combination of game theory and chain algorithms encourages participants to maintain a stable coin value.
⠀