Digital assets that are pegged to fiat currencies or some other stable asset. They aim to be a
means of payment with a similar volatility as fiat currencies. As stablecoins are digital assets, they can be seamlessly integrated into other DeFi applications. Users can quickly conduct on-chain transactions with these coins without the need for using traditional financial infrastructures.
Stablecoins come in two varieties. Asset backed stablecoins are blockchain-based tokens that have their value pegged to a reserve asset such as another digital currency, fiat money or a commodity. In contrast, algorithmic stablecoins try keep a stable value by managing the supply of the coin based on demand from users. However, the recent collapse of Terra (Luna) has shown that algorithmic stablecoins may not always be able to retain their stable value making them unsuitable as a means of payment.
Also, the adequacy of reserves of asset backed stablecoin projects have recently been publicly challenged.
Some of the most popular stablecoins include Binance USD (BUSD), USD Coin (USDC), and Dai (DAI). In additon to these private sector-driven initatives, central banks around the world are looking into the opportunities of Central Bank Digital Currencies (CBDC).