## Why do crypto traders need stablecoins? This question deserves a closer look.

When it comes to digital assets, volatility is the first and foremost problem. The price can drop by 20% in an hour and then rise by 30%. That's why a stablecoin is the solution that allows you to maintain value without wild fluctuations. In fact, it is a type of cryptocurrency specifically designed to hold a stable market price. In recent years, the popularity of such coins has grown exponentially, and now there are more than enough projects with stablecoins.

## How do they support the price?

The concept is simple: a stablecoin is an asset tied to something stable. Most often this is the US dollar, but there are also ties to other cryptocurrencies, precious metals like gold, silver or even fiat currencies of other countries. Thanks to this architecture, they avoid the extreme price fluctuations typical of the volatile crypto market.

## Two main types: collateralized and algorithmic

**Collateralized stablecoins** are the most popular option. The companies that issue them hold real assets (cash, gold, securities) in reserves on a 1:1 basis. When someone wants to issue a new coin, they need to deposit the equivalent in fiat currency. Classic examples: USDC (USD Coin), Paxos (PAX), and TrueUSD (TUSD) – each token is backed by money in bank accounts.

However, there are stablecoins backed by cryptocurrency. DAI in the Maker DAO ecosystem is a vivid example. They maintain the peg through over-collateralization and built-in stability mechanisms.

**Algorithmic (unsecured) stablecoins** work differently. They use smart algorithms to control the number of tokens in circulation. When the market diverges from the target price, the system automatically expands or contracts the supply – similar to how a central bank operates, but without human intervention.

## Why are they useful?

Stablecoins combine the best of both worlds: the transparency and decentralization of crypto assets with the predictability of fiat currency. Additionally, they enable transactions to be conducted faster and cheaper than bank transfers, especially for international payments. This makes them ideal not only for hedging against volatility risks but also for everyday transactions.

**_Disclaimer:_** _According to MiCA requirements, some stablecoins have restrictions for users from the EEA. More details can be found in the official guidelines._