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Stablecoins are cryptocurrencies designed to maintain a stable value, typically pegged to fiat currencies like the US dollar. They achieve this peg through various mechanisms: fiat-backed stablecoins are collateralized by reserves of fiat currency, crypto-backed stablecoins use other cryptocurrencies as collateral, and algorithmic stablecoins rely on algorithms to adjust supply and demand. These mechanisms aim to keep the stablecoin's value relatively constant. However, risks include centralization (in the case of fiat-backed stablecoins), where a single entity controls the reserve, over-collateralization or under-collateralization (in crypto-backed coins), and market volatility affecting algorithmic stablecoins. Regulatory scrutiny is also increasing as stablecoins grow in use, which could impact their adoption and stability.
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