Stablecoins function as cryptocurrencies whose respective values are pegged to an underlying currency, commodity, or another financial instrument. Most often, stablecoins exist to maintain a stable value over time and provide a solid alternative to those unwilling to risk the elevated volatility of major coins such as Bitcoin or Ethereum.
The two largest stablecoins by market capitalization, Tether (66 billion USD currently) and USD Coin (56 billion USD), came to massive popularity through their mandates of remaining pegged to the US dollar.
They succeed by capitalizing on three central pillars:
1. Operate as a medium of exchange, not speculation
2. Maintain a peg to an external asset throughout all market situations or cycles
3. Hold reserve assets or utilize a tested algorithm able to maintain supply
When one of these fails, the stablecoin fails. For example, Terra Luna famously crashed after holders lost confidence in the coin’s ability to maintain its peg.
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