What is Stable Coin?

A stable coin is cryptocurrency coin, which has price directly linked to Fiat currency like USD, EUR, JPY. So, 1 unit of cryptocurrency stable coin is equal to 1 USD. The main purpose of a stable coin is to hold a stable value and thus to prevent high volatility in the cryptocurrency markets. This means that you have now a stable currency in cryptocurrency eco-system and you can use different tools or products, which require a low volatility asset for its functionality – for example Collateralized Debt Position (CDP).

A stable coin is one of the most important things in entire cryptocurrency space. Why? Because without functional stable coins, it is not possible to mass adoption by ordinary people. It is necessary to develop and have a functional stable coin for further development of cryptocurrency industry. Cryptocurrencies like BTC or ETH has massive volatility and nobody wants to pay today for coffee 5 USD in ETH and to look, how ETH will jump by 30% tomorrow.

Every stable coin has to be collateralized by some type of assets like Fiat currency (Fiat-collateralized) or crypto asset (BTC, ETH) (crypto-collateralized). Also, in the development is an interesting concept of a non-collateralized stable coin. So, totally we have 3 different types of Stable coins – Fiat-collateralized, crypto-collateralized and non-collateralized.


This is the easiest way, how to create the stable coin. Basically, you just create virtual IOU, which is payable by 1 USD. So, you deposit USD to the bank account and issue stable coins 1:1 against deposited USD. When the user wants to exchange stable coins to USD back, the system will destroy the exact amount of stable coins, which user exchanging.

Fiat collateralized stable coin

This system ensures 100% stability of stable coin but for a very high price – Centralization and high risk of a fraud. Basically, somebody has to control this system and ensures the correct amount of stable coin units in circulation.

Example project: Tether.to Whitepaper


Imagine, that you can issue a stable coin, which is collateralized by some type of crypto assets like ETH or BTC. But how? Cryptocurrencies have such high volatility. The idea is very simple – for example, you just deposit 1 000 USD in the worth of Ethereum and issue 500 units of stable coin in the worth of 500 USD. Your stable coins are now 200% over-collateralized and you have a free pillow for possible price drops.

Crypto collateralized stable coin

If the price of Ether drops by 30% to 700 USD, our 500 units of stable coins are still collateralized by the worth of 700 USD in Ethereum. We can liquidate them now if we want that we giving 500 USD in Ethereum to the owner of the stable coins, and the remaining 200 USD in Ethereum, we just return back to the original depositor. So, the basic mechanism is, that your stable coins are over-collateralized and if the price drops enough, the stable coins get liquidated. This can be done completely in a decentralized way based on smart contracts.

It is necessary to mention, that this system can be completely decentralized and transparent, which is a very strong advantage against Fiat-collateralized stable coins. But on the other hand, it is very vulnerable to hacks or price crashes. The only way, how to prevent the potential crash is a strong algorithm, which ensures price stability of stable coin.

Example project: Maker DAO with stable coin Dai, Whitepaper of stable coin Dai


In 1971 US President Richard Nixon canceled gold standard to the US Dollar. From this time US Dollar has no any form of backed asset, which represents the real value of US Dollar. This form is known also as Fiat money, which has no intrinsic value. So, there is now a question, if we can create a similar system in cryptocurrency space like in traditional finance system.

Non-collateralized stable coin

What if smart contract works like central bank system, where coin supply is driven only by strict rules based on the smart contract? Target price and the ideal of this stable coin is 1 USD but how it works, when the price will be for example 3 USD? Very simple – the smart contract will create more supply to decrease price and when the price is below 1 USD, the smart contract can bid these coins on the open market to buy (decrease coins supply and increase price) with extra profit. In history, when governments do this, these profits were called the seignorage.

Example project: Basecoin, Whitepaper (draft) 

Where to continue studying

If you are interested in stable coins and you want to know, how exactly works Crypto-collateralized and Non-collateralized, I very recommend read the whitepapers of each project. Stable coins are very complex and hard to understand the topic in cryptocurrency industry and best way how to get involved is start reading and discussion on Reddit channels. For example, Maker Dao has a very good community, which will answer to any your question.