Stablecoins are created with the intention of having a currency that realizes a steady price. Virtual currencies (crypto assets) such as Bitcoin are often said to have issues including intense price fluctuations compared to fiat currencies such as USD or JPY. As virtual currencies have become more widely adopted, the perception of problems in price stability have persisted. Stablecoins were developed as a solution to that problem.
Stablecoins generally attempt to achieve stability in one of three ways.
Fiat currency model
These stablecoins maintain a fixed exchange rate to an established fiat currency with the intent of maintaining price stability.
For example, if a stablecoin has its exchange rate set to 1 USD, the holder of that coin could exchange it for 1 USD under set conditions. This also means that this stablecoin could be exchanged for other virtual currencies using the same exchange rate as USD.
These stablecoins maintain their value by ensuring that the volume issued is equal to the volume issued by the fiat currency they maintain a fixed exchange rate to. However, there are some fiat currency model stablecoins which do not issue the same volume as the corresponding fiat currency, so they do not maintain 100% reliability.
There are also some stablecoins that use this structure by fixing their value to that of a commodity such as gold or oil instead of a fiat currency.
Virtual currency model
These stablecoins maintain their value with a designated virtual currency. The main difference from the fiat currency model is that they do not have to rely on a central authority, so they maintain the characteristics of a decentralized virtual currency. However, it is difficult to achieve price stability when fixed to the price of a virtual currency, so there are some ideas such as doubling the corresponding virtual currency’s volume.
These stablecoins adjust their volume to achieve price stability without having to be fixed to a fiat or virtual currency.
If the price is significantly high, they can lower the price by issuing additional coins and increasing the overall supply. Conversely, if prices are significantly low, they can raise prices by buying coins from the market and reducing the overall supply. In the unsecured model, the price is automatically adjusted by an algorithm using economic principles.