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Stablecoins explained: Three main types of stablecoins and how they work

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POSTED

31 March 2023

Are you tired of the emotional rollercoaster ride from the price fluctuation of Bitcoin and Ethereum? Meet their calm and collected cousin – stablecoins! These digital currencies are all about stability and are pegged to traditional currencies like the US dollar, Euro, or Yen to keep their value steady. While other cryptos are bouncing around like they’re on a pogo stick, stablecoins stay grounded with various methods like being backed by fiat currency or using algorithms to maintain a steady price.

Investors, traders, and businesses are flocking to stablecoins for their stability, making them a popular choice for transactions with merchants and businesses as their value is unlikely to change rapidly. In this article, we’ll explore the different types of stablecoins available in the market and compare their features, pros, and cons. By the end of this read, you’ll be a stablecoin expert and ready to dive into the world of crypto with confidence. Let’s get started!

Types of Stablecoin

So why are there so many types of stablecoins given their only job is to keep things predictable and steady? Turns out, this is much harder than it sounds. To understand this, you need to learn about the stablecoin trilemma.

The Stablecoin Trilemma


The stablecoin trilemma is very similar to that of the “Impossible Trinity” in macroeconomics, where mathematically, you can only have any two of free capital flow, fixed exchange rates and sovereign monetary policy for any given policy choice. Macroeconomic policies will hence have to work around these limitations, with governments choosing between what they value most when implementing said policies.


The stablecoin trilemma is similar to the “Impossible Trinity” in macroeconomics. Basically it means that a stablecoin can only achieve two out of three properties at once: decentralization, stability, and scalability.

Decentralization is a key factor in the appeal of cryptocurrencies, but achieving full decentralization can make it challenging to maintain stability without a central authority to back up the value of the stablecoin.

Stability is crucial for stablecoins, but sometimes it may require sacrificing decentralization or scalability.

Scalability is also important to ensure that the stablecoin can handle large amounts of transactions and users, but achieving scalability can sometimes come at the expense of stability.

In essence, creating a stablecoin that can achieve all three properties is a real challenge – like trying to juggle three hot potatoes at once. To create a successful stablecoin, tough choices may need to be made based on what is valued most.

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