Understanding Stablecoins, From Fiat-Backed to Algorithmic

Stablecoins are a type of cryptocurrency that aims to maintain a stable value by pegging it to real-world assets, such as fiat currencies or gold, or by utilizing specific algorithms. Unlike Bitcoin and other cryptocurrencies that experience high volatility, stablecoins provide price stability. This makes them an ideal choice for everyday transactions and digital asset trading.

How Do Stablecoins Work?

Stablecoins work by backing the value of their coins through equivalent asset reserves. These reserves serve as collateral to keep the stablecoin price stable and can be exchanged for the pegged asset at a fixed ratio (for example, 1 USDT = 1 USD). Some stablecoins also use algorithms to regulate supply and demand to maintain price stability.

Types of Stablecoins

Stablecoins are divided into four main categories based on the mechanism used to maintain their value:

1. Fiat-Backed Stablecoins

Backed by fiat currencies such as USD, EUR, or JPY. Examples: Tether (USDT), USD Coin (USDC). Advantages: High stability because real assets back it. Risks: It tends to be centralized and depends on third parties to store reserves.

2. Commodity-Backed Stablecoins

Its value is supported by commodities such as gold, silver, or oil. Examples: Paxos Gold (PAXG) and Digix Gold (DGX). Advantages: Potentially protects against inflation. Risks: Fluctuations in commodity prices can affect the value of stablecoins.

3. Crypto-Backed Stablecoins

Guaranteed by other crypto assets as collateral. Examples: DAI (supported by Ethereum and other crypto assets). Advantages: More decentralized than fiat-backed stablecoins. Risks: Its value can be affected by the volatility of the collateralized crypto assets.

4. Algorithmic Stablecoins

It lacks real reserves but employs algorithms to manage supply and demand. An example is TerraUSD (UST) before its de-pegging in 2022. Advantages include being fully decentralized. Risks involve vulnerabilities to failures in the algorithmic mechanism, as demonstrated by UST.

Stablecoin vs Bitcoin

Are Stablecoins Safe?

Stablecoins are often considered safer than other crypto assets because they have a stable value. However, their safety depends on the transparency of the issuer and the asset reserves they claim. Some risks to consider include:

Lack of Transparency: Some stablecoins face criticism regarding the clarity of their reserves.
Regulation: Governments in various countries continue to study stablecoin regulations to avoid risks to the financial system.
Mechanism Failure: Algorithmic stablecoins like UST experienced failures that resulted in huge losses for their investors.

The Role of Stablecoins in the Future

Stablecoins are becoming increasingly important in both the cryptocurrency and global financial ecosystems, particularly in areas such as cross-border payments, digital asset trading, and the integration of traditional financial systems. As regulations become more stringent, stablecoins that offer transparency and clear asset backing are likely to emerge as safer and more efficient solutions in the digital finance landscape.

Stablecoins are an innovative solution designed to address the volatility in the cryptocurrency market, offering a more stable alternative for transactions and investments. However, investors should carefully consider the type of stablecoin they use and its safety features to protect themselves from potential risks.

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Sumber:

Stablecoins: Definition, How They Work, and Types. Accessed in 2025. Investopedia.

What Is a Stablecoin? A Beginner’s Guide. Accessed in 2025. Be(In)Crypto.

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Disclaimer:

This content is intended to provide additional information to readers. Always do your research before investing. All buying and selling activities and crypto asset investments are entirely the reader's responsibility.