Cryptocurrency prices can swing wildly from one day to the next, but stablecoins stand out as assets with consistent value.

But what exactly are these digital assets, and why have they become so important in the global financial ecosystem?

Whether you’re new to the world of digital currencies or exploring payment solutions for your business, understanding stablecoins is crucial in today’s evolving financial system.

What Are Stablecoins?

Stablecoins are a type of cryptocurrency designed to maintain a stable value by pegging themselves to an external asset, such as a fiat currency (like the US dollar), a commodity (like gold), or through algorithmic mechanisms.

Unlike Bitcoin or Ethereum, which can experience significant price movements, stablecoins offer the benefits of blockchain technology without the volatility.

Think of stablecoins as digital versions of traditional money that operate on blockchain technology. A dollar-backed stablecoin, for example, is designed to always be worth approximately one US dollar, regardless of market conditions.

Types of Stablecoins

Several types of stablecoins exist, each using different mechanisms to maintain their peg:

1. Fiat-collateralized stablecoins
2. Crypto-collateralized stablecoins
3. Algorithmic stablecoins
4. Commodity-backed stablecoins

Fiat-collateralized stablecoins

Reserves of fiat currency back these at a 1:1 ratio. For each stablecoin in circulation, there is (ideally) one unit of the corresponding currency held in reserve. Examples include USDC and USDT.

Crypto-collateralized stablecoins

These use other cryptocurrencies as collateral, typically over-collateralizing to account for potential volatility. DAI is a prime example where users lock up Ethereum and other assets as collateral.

Algorithmic stablecoins

These maintain their peg through algorithms and smart contracts that automatically adjust the supply based on demand. They don’t require collateral but rely on market conviction and complex mechanisms. Due to the nature of the “balancing” mechanism to ensure a securely pegged value, algorithmic stablecoins can be highly volatile and considered risky. You may recall what happened in May 2022 with UST and LUNA.

Commodity-backed stablecoins

Representing a small share of the market, this type of stablecoin is backed by physical assets like gold, silver, or real estate, with each token representing a claim on the underlying asset.

Ready to explore what stablecoins can do for you?

If you’re looking to optimize your business payments or seeking more efficient ways to move money across borders, alfred is here to help. We’ve built simple, secure infrastructure connecting traditional banking to stablecoin technology throughout Latin America, with no crypto expertise required.

• New to stablecoins? Our team provides step-by-step guidance
• Business owners: Reduce fees and settlement times for international transactions
• Finance professionals: Maintain compliance while modernizing your payment stack

Start with a no-pressure conversation about how stablecoins might benefit your specific situation.