A stable coin is a type of cryptocurrency that’s pegged to other stores of value like fiat currency, other cryptocurrencies or even commodity money like gold. The idea is that the value of these other assets would support the value of the stable coin and reduce volatility.
The value of cryptocurrencies that aren’t stable coins such as Bitcoin is determined by the forces of demand and supply. This means that if more people believe it’s valuable, then it is. On the other hand, if fewer people believe in its value, then, its value drops. Factors like the opinion of the media, a government’s opinion and even how the average person feels about the coin could influence its value in the market.
The volatility quality makes a cryptocurrency like Bitcoin a perfect fit as an investment asset but not as a medium of exchange for day to day transactions.
On the other hand, stable coins enjoy stability because they are pegged to assets that have relatively strong stability. This makes them better suited for day to day transactions and as a store of value.
The most popular stable coins are backed by strong fiat currencies like USD, GBP and Euro. But there are a few others that are backed by other asset types. An example is MakerDAI that’s backed by a mix of decentralized crypto assets.
Like USDT, other US Dollar backed stable coins include Gemini Dollar, TrueUSD and USD Coin.