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A stablecoin is a coin pegged to another underlying asset, usually fiat currencies such as the US Dollar, but can also include commodities like gold, and even cryptocurrencies. The asset to which the stablecoin is pegged does not need to match the asset it refers to. Depending on how their values are stabilised, stablecoins can be grouped into 3 different categories;

Algorithmic stablecoins, like Frax

Algorithmic stablecoins use algorithms and smart contracts to dynamically adjust the supply of the stablecoin to maintain its price stability. These stablecoins do not rely on collateral backing and instead use mechanisms such as algorithmic buy and sell orders to stabilise the price.

Crypto-backed stablecoins, like DAI 

These stablecoins are backed by a reserve of other cryptocurrencies. Smart contracts are used to maintain the stability of the stablecoin by adjusting the supply of the collateralised cryptocurrency based on demand.

Fiat-backed stablecoins, like USD Coin

Some stablecoins are backed by reserves of fiat currency (e.g., USD) held in a bank account. Each stablecoin issued is backed by an equivalent amount of fiat currency, providing a direct peg to the value of the fiat currency.

In the EU, stablecoins have been redefined by the Market in Crypto-assets Regulation (MiCA). Read about MiCA's new definition in Stablecoins Are No More: MiCA’s EMTs and ARTs Explained.

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