Stablecoins are cryptocurrencies designed to minimize the volatility of the price of the crypto, relative to some "stable" asset or basket of assets via blockchain technology. The price movement of cryptocurrencies within one trading day can be very high. But cryptocurrencies are not issued by the state, which means that they must seek other avenues for price stabilization. In this article, we are going to talk about 3 major categories of stablecoins and how they work.

1. Fiat-Collateralized Stablecoins

This is backed by sovereign currency such as the pound or the US dollar. It means that to issue a certain number of tokens of a given cryptocurrency, the issuer must offer dollar reserves worth the same amount as collateral. For example, USDT is a token based on the stable value currency (USD) launched by Tether. 1USDT = 1 USD. Users can use USDT to exchange 1:1 with USD at any time. Tether strictly abides by the 1:1 reserve guarantee, that is, for every USDT token issued, its bank account will have a 1 USD fund guarantee.

• Risk: highly dependent on the token issuer, if the issuer is improperly managed, the token will face death.
• Common fiat-collateralized stablecoins: USDT, USDC, TUSD, PAX, GUSD, etc.

2. Crypto-Collateralized Stablecoins

Users collateralize the cryptocurrency on the blockchain, and the blockchain issues a certain number of stablecoins based on the value of the collateralized assets. The principle concept is “over-collateralization.” It means that a relatively large amount of reserve cryptocurrencies may be needed to issue even a small number of tokens.

The crypto-collateralized stablecoins are not issued and managed by an institution but are stored in the smart contract, thus ensuring transparency and solving the problem of centralization. But its disadvantage is that the value of the cryptocurrency kept as a guarantee is volatile. Once the collateralized assets are cut overnight, the value of the stable currency will have a large value decline.

• Risk: Rely on protocol design and governance institutions. Conversion, collateral is also subject to cryptocurrency.
• Common crypto-collateralized stablecoins: DAI, SNX, etc.

3. Non-Collateralized (Algorithmic) Stablecoins

These stablecoins do not involve the use of any reserve asset. It is an algorithm to adjust the total amount of market currency, increase market supply when the price is higher than the anchor price, recover the supply when the price is lower than the anchor price, or provide arbitrage space to balance the price.

At present, the algorithmic stablecoins are still in a very early stage, and the price cannot maintain a very stable range. However, the market believes that the continuous change of time and the continuous increase in the number of participants in the transfer of some good projects will eventually continue to move closer to this range.

• Risk: Insufficient funds to maintain its sovereign risk.
• Common algorithmic stablecoins: AMPL, ESD, BAC, BXC, etc.

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