Stablecoins are a type of cryptocurrency designed to maintain a stable value by being pegged to an underlying asset or benchmark, such as fiat currencies (e.g., USD or EUR), commodities (e.g., gold), or even other cryptocurrencies. Their primary goal is to reduce the volatility often associated with traditional cryptocurrencies like Bitcoin or Ethereum, making them a reliable medium of exchange, store of value, or unit of account.

There are three main types of stablecoins based on how they maintain their stability:

Fiat-collateralized stablecoins: Backed by reserves of fiat currency, such as USD. For every token issued, an equivalent amount of fiat is held in reserve. Examples include USDT (Tether) and USDC.
Crypto-collateralized stablecoins: Backed by other cryptocurrencies as collateral but often over-collateralized to account for crypto’s price volatility. An example is DAI.
Algorithmic stablecoins: Use algorithms and smart contracts to control the token supply and maintain price stability without direct backing. Examples include UST (TerraUSD, prior to its collapse).

Stablecoins are widely used in the crypto ecosystem for trading, remittances, DeFi (Decentralized Finance) applications, and as a hedge against market volatility.