A stablecoin is a cryptocurrency designed to maintain a consistent price relative to another asset, usually the U.S. dollar. Said another way, a perfectly effective stablecoin pegged to the dollar will always be worth $1. This behavior differs dramatically from traditional cryptocurrencies like bitcoin and ethereum, which are known for their volatility.
How do stablecoins maintain their value?
Stablecoins maintain their value by holding collateral or by using computer algorithms to force price stability by manipulating supply and demand.
Some currencies are better at this than others. Stablecoins do occasionally fall below their target values, both temporarily and permanently. An extended dip below the target value is called depegging, an event that undermines trust in the currency’s issuer and, sometimes, in the entire crypto economy.
Catherine Brock | Yahoo Finance