Definition
The definition of stablecoin states that it is a cryptocurrency whose value is fixed to a well-known fiat currency (like USD), an asset (like gold), a collection of fiat currencies / precious commodities, or an algorithm to maintain its value.
Understanding the term
The reason why stablecoins originated was to minimize the volatility associated with cryptocurrencies. A lot of investors, both retail and institutional, have avoided the crypto market due to its unpredictability, which threatens the stability required in any financial market.
Generally, stablecoins are associated with the US dollar (for example, Tether and USD Coin). Stablecoins are designed to maintain their fixed value over the course of time so that both traders and investors can be protected from drastic price fluctuations due to any event.
Tether (USDT), whose underlying asset is the US dollar on a 1:1 basis, is one of the most popular and in-demand stablecoins. But over the past few years, the number of stablecoins in the cryptocurrency market has increased manifold because investors and traders consider them a better and more secure alternative to other digital assets, which are plagued by price volatility.
Takeaway
A stablecoin is a type of cryptocurrency representing a fixed value of any fiat currency, asset, or even a collection of two or more currencies linked through an algorithm. Due to maintaining a fixed value, stablecoins are considered a less risky investment.