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Stablecoin
Practical Law Glossary Item w-020-6329 (Approx. 3 pages)
Glossary
Stablecoin
A cryptocurrency that is tied to the value of an underlying asset, most often a fiat currency like the US dollar. While the value of many cryptocurrencies may be volatile, stablecoins are designed to limit volatility by maintaining a fixed valuation in relation to (in other words, "pegged" to) a specified quantity of the underlying asset (for example, one dollar). Stablecoins combine the benefits of cryptocurrency, including transparency, instantaneous transaction processing, low fees, and privacy, with the stability and trustworthiness of fiat currency.
Stablecoins may take the following forms:
- Fiat-backed stablecoins, the most common type of stablecoin, which are fully backed by a fiat currency at a specified ratio. The issuer of a fiat-backed stablecoin must maintain a reserve of the fiat currency, usually on deposit with a bank or other third-party custodian, equivalent to 100% of the amount of stablecoin in circulation.
- Commodity-backed stablecoins, which are backed by commodities, most commonly gold. The physical commodity backing the stablecoin is typically stored in a third-party vault.
- Cryptocurrency-backed stablecoins, which are backed by other digital currencies. These may be collateralized by a mix of cryptocurrencies to minimize risk and volatility and are often overcollateralized to further buffer against price volatility.
- Stablecoins backed by a mix of fiat currencies, commodities, and cryptocurrencies. Issuers of these stablecoins aim to minimize risk and volatility by diversifying the collateral pool that backs the stablecoin.