Stablecoin

A stablecoin is a cryptocurrency pegged to a stable asset like USD. Bitcoin swung from 16k to 60k in a year. This makes it useless as a store of value or medium of exchange. Stablecoins solve this by maintaining a fixed value through backing. USDC and USDT are fiat-backed. Issuers hold reserves in banks. For every stablecoin in circulation, they hold a dollar.

Celsius collapsed and customers lost access to stablecoins because the issuer mismanaged reserves. DAI is crypto-collateralized. You deposit crypto worth more than the stablecoins you mint. The over-collateralization protects against price drops. If collateral falls below the threshold, the system liquidates it.

This is transparent and trustless but expensive, you need to deposit 150 dollars of crypto to mint 100 stablecoins. Algorithmic stablecoins maintain peg through incentives and arbitrage. They usually fail when market dynamics shift. You can't meaningfully trade on a DEX if you're constantly converting between volatile currencies. You can't lend and borrow if collateral value is swinging wildly.

Stablecoins enable DeFi by providing price stability.