A stablecoin is a digital currency that is linked to an underlying asset such as a national currency or a precious metal such as gold. The main types of stablecoins include fiat-backed, cryptocurrency-backed and commodity-backed stablecoins.
"Stablecoins are a type of cryptocurrency that are designed to maintain a fixed value, often pegged to a fiat (government-backed) security," says Adam Lowe, chief innovation officer of CompoSecure, designer and manufacturer of premium financial cards.
Cryptocurrencies are a new asset class evolving rapidly in an increasingly tech-driven economy. As a consequence, cryptocurrencies are subject to major volatility, which can change their value in a matter of seconds.
Since they are pegged to a more stable asset such as the U.S. dollar, stablecoins were created to manage price swings often seen in Bitcoin and other cryptocurrencies.
Cryptocurrencies have proved to be sensitive to market events, but stablecoins tend to be less influenced by market conditions.
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