## Why are investors increasingly following stablecoins?

Stablecoins have become an indispensable tool in the crypto market. The core objective of these digital assets is to maintain a relatively stable price, not subject to drastic market fluctuations. If you have ever been eager to close positions during a significant drop in coin prices, or found yourself troubled by price volatility during trading, stablecoins are designed to address this issue.

Compared to traditional cryptocurrencies, stablecoins typically anchor their value to real assets—most commonly the US dollar, but also to gold, silver, or other crypto assets. This design allows stablecoins to maintain a relatively stable price in the highly volatile environment of the crypto market.

## How are stablecoins classified?

**Category 1: Fiat-backed Stablecoins**

This type of stablecoin is backed by real fiat currency reserves. The issuing company must hold an equivalent amount of US dollars or other fiat currencies in order to mint the corresponding number of tokens. Typical representatives include:

- **USD Coin (USDC)**: Each USDC token is backed by 1 US dollar in cash or equivalent assets on a 1:1 basis.
- **Paxos (PAX)** and **TrueUSD (TUSD)**: Both use the same 1:1 collateral mechanism, stored in bank accounts.

This model is the most transparent and reliable—you can be sure that each token is backed by actual assets.

**Category 2: Crypto Asset-Backed Stablecoins**

Some stablecoins are not backed by fiat currency but are supported by other crypto assets, maintaining price stability through over-collateralization and algorithmic mechanisms. **DAI** is a prime example of this category, issued by the **Maker DAO** ecosystem. This model allows users to mint stablecoins by collateralizing crypto assets, providing greater flexibility.

**Category Three: Algorithmic Stablecoins**

No reserve assets are required; the token supply is fully adjusted by algorithms to stabilize the price. When market demand increases, the system automatically increases the supply; when demand decreases, the circulation is reduced. This type of stablecoin carries relatively high risks but represents a direction of technological innovation.

## What are the practical uses of stablecoins?

Stablecoins combine the advantages of fiat currency and cryptocurrency. On one hand, they retain the convenience of blockchain – fast transaction speeds, low fees, and barrier-free cross-border payments. On the other hand, they avoid the severe price volatility of traditional crypto assets.

In practice, stablecoins are mainly used in three scenarios:

1. **Volatility Hedge**: When the market drops significantly, quickly convert assets into stablecoin to avoid risk.
2. **International Transfers**: Compared to bank remittances, stablecoin cross-border transfers are faster and cheaper.
3. **Daily Payments**: Some regions have started to accept stablecoins as a means of payment.

The emergence of stablecoins bridges the gap between the traditional financial system and the crypto world, becoming a bridge that connects the two realms. For users who want to enjoy the convenience of blockchain while being concerned about price risks, stablecoins are undoubtedly the ideal choice.