Stablecoins are tokens that are pegged to the price of a real world asset. The most common ones and ones that people typically are referring to when they say "stable coins" are those that are pegged to the US Dollar.
Not all stablecoins are created equally.
Some stables are "algorithmic" stable coins. These coins are not "backed" by real world assets rather they have some other mechanism that keeps their price on-peg. These historically have not worked out very well and loss their peg easily. Other stables are collateralized. This means that they have real-world assets backing them. Could be actual dollars, commercial paper, government bonds, etc.
And others are a hybrid of both.
Stablecoins are a huge rabbithole. You could spend the better part of a year researching full-time the stablecoin ecosystem and probably still not get to half of the projects. Here are some general tips that I follow:
- USDC and GUSD are well-respected in the industry
- DAI is up there (and a decentralized solution) but is over 50% collateralized by USDC so it gets some push back.
- USDT - stay away from it. There's a lot of unknows around it, the founders, the team, shady business, etc. They've been pretty quiet with the holdings/makeup of their reserves so no one really knows if each USDT is backed by anything.
Why would you want to use stablecoins?
Stablecoins have a lot of purposes. The main two are:
- You want to take profits on some of your crypto-gains but you want to keep your "money" in the crypto ecosystem instead of sending it back to your fiat bank account.
- You want to participate in Defi with stables and receive APY. The advantage of using stables in Defi is that you don't have to worry about the price of an unstable underlying asset.