What is a Stablecoin?

A stablecoin, as the name suggests, is a type of cryptocurrency that maintains a stable exchange rate with a specific benchmark.

In the blockchain community, the most commonly heard stablecoin is USDT (Tether). Let’s take USDT as an example. It is a dollar-pegged token called Tether USD (referred to as USDT) issued by Tether. 1 USDT = 1 USD, and users can exchange USDT for USD at a 1:1 ratio at any time.

Besides USDT, other dollar-pegged stablecoins include TUSD, GUSD, and BitUSD. There are also stablecoins pegged to other currencies, such as BitCNY, which is pegged 1:1 to the Chinese yuan.

You might ask: Does the money transferred via WeChat or Alipay count as stablecoins? After all, they are also pegged 1:1 to the yuan.

In reality, the money in mobile payments or Alipay can only be called electronic money, not stablecoins. If the central bank issues a central bank digital currency (CBDC) in the future, pegged to the current yuan, this CBDC could then be called a stablecoin.

In other words, a stablecoin is not just the digitization of currency—it is also a programmable cryptocurrency, a category of money that only emerged after the advent of blockchain technology.

How Do Stablecoins Maintain Their "Stability"?

Exchange rates between global currencies are always fluctuating, so how do stablecoins maintain a "stable exchange ratio"?

Take USDT, mentioned earlier. Tether promises to strictly adhere to a 1:1 reserve guarantee, meaning that for every USDT issued, there is $1 held in its bank account. Users can check the funds on Tether’s platform to ensure transparency. This is how stability is maintained through "fiat currency collateral."

The second type of stablecoin relies on "digital asset collateral." A typical example is BitCNY. You can mortgage BTS coins to the system, and the system will issue you BitCNY. Since the price of digital assets is volatile, if the price of BTS drops sharply and the total value of your mortgaged BTS coins approaches the total value of BitCNY the system lent you—and you don’t increase the collateral—the system will forcibly sell your mortgaged BTS coins to repay the BitCNY. This is similar to a bank mortgage in real life: if the value of your house drops and you can’t provide additional collateral, the bank will repossess and sell the house to cover your loan.

The third type of stablecoin relies on algorithms to ensure stability. A classic example is Basis, which, like the Federal Reserve, adjusted its supply to maintain a 1:1 peg with the USD. However, the Basis project has since shut down.

The Uses and Flaws of Stablecoins

You might wonder: If WeChat and Alipay are so convenient, why create stablecoins?

Indeed, in daily life, stablecoins have limited utility, and transfers aren’t as convenient as WeChat or Alipay.

But in the cryptocurrency space, stablecoins serve many purposes—they act as a bridge between the real world and the crypto world. Cryptocurrencies are highly volatile, so stablecoins function as a measure of value and even serve as a safe haven during market downturns.

Of course, current stablecoins are far from perfect.

Fiat-collateralized stablecoins, like USDT mentioned earlier, are issued by Tether, which has faced criticism for lacking financial transparency and allegedly over-issuing USDT for profit.

Digital asset-collateralized stablecoins, like BitCNY, face issues due to the high volatility of BTS. When prices plummet and the system becomes undercollateralized, many investors’ mortgaged BTS coins are forcibly sold below market price, causing further price drops and triggering cascading liquidations.

Algorithmic stablecoins, meanwhile, have faced even more criticism.

Conclusion

Today, many countries are researching national digital currencies. Venezuela has even launched its own national digital currency—the Petro. In the field of digital currency research, China’s central bank is at the forefront globally.

National digital currencies, also known as central bank digital currencies (CBDCs), are essentially stablecoins.