What is a Stablecoin?

Fiat-backed stablecoins, crypto-backed stablecoins, and algorithmic stablecoins. These categories are not mutually exclusive, and a stablecoin may also use a combination of these mechanisms to maintain its value. a theoretically perfect stablecoin would have three key features – price stability, capital efficiency, and decentralization. The fundamental factors affecting a stablecoin’s ability to maintain its peg to a fiat currency are: (1) the composition of its reserveassets, and (2) the size of its capital buffer. The capital buffer is necessary to protect against an unexpected decrease in the value of the reserve assets, which typically include cash, cash equivalents, and government bonds maturing within 90 days. But a fiat-backed stablecoin might also be backed by other types of assets, e.g. securities or commodities such as precious metals. In a custodial arrangement, the reserve assets backing the stablecoin are held in custody by the stablecoin’s issuer. 

.A “stablecoin arrangement” is the ecosystem around a stablecoin, including the processes, people, and entities involved in using it. The processes include issuing and redeeming the stablecoin, transferring it between users and maintaining the stablecoin’s peg. The people and entities include not only the stablecoin’s holders and its issuer (which could be a legal entity or protocol), but also many others, such as custodians, developers, exchanges, market makers, and arbitrageurs. Throughout the whitepaper, we use the term “stablecoin” to refer to a digital asset that is supposed to maintain a stable value. We want to use language that is familiar to most crypto market participants, and use technical terms only where their precision is important from a policy perspective. For the same reason, we use the following terms for three main types of stablecoins, based on the different mechanisms they use to maintain their value: In the future, we believe stablecoins will be used as money, just as easily as hard currency and bank deposits are today. 

Stablecoins are cryptocurrencies whose value is pegged, or tied, to that of another currency, commodity, or financial instrument. Stablecoins aim to provide an hedge against the fiat currencies and cryptocurrencies, including Bitcoin, which has made crypto investments less suitable for transactions. Table 1: Stablecoin arrangements – functions and activities: Governance, Issuance Redemption & Stabalization of Valuem Transfer, Storage & Interaction with Users.