A stablecoin is a cryptocurrency designed to maintain a stable value by pegging to a reserve asset, typically the U.S. dollar, though some are backed by other fiat currencies, commodities, or algorithms. The most common type is fiat-collateralized, where issuers hold one dollar in reserves for every stablecoin token issued. Stablecoins serve as a bridge between traditional finance and crypto, enabling traders to move value quickly without volatility exposure.
Example:
USDC (USD Coin) is a stablecoin that trades at approximately $1.00. If Bitcoin crashes 20% in an hour, a trader holding $50,000 in Bitcoin can immediately swap it for 50,000 USDC, preserving their value. They can later buy back into crypto markets without converting to fiat or leaving the blockchain ecosystem.