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The Union Finance Minister recently emphasized that countries must be prepared to engage with stablecoins, noting that rapid innovations in the cryptocurrency space are reshaping the global monetary order.

What are Stablecoins?

• Stablecoins are a category of cryptocurrencies designed to maintain a steady value by being linked to a reference asset—most often a fiat currency like the U.S. dollar, though they may also be tied to commodities or a basket of currencies.
• Unlike volatile digital assets such as Bitcoin or Ethereum, stablecoins are meant to minimize price fluctuations, making them more practical for payments, remittances, and everyday transactions within blockchain-based systems.

Types of Stablecoins

1. Fully-Backed (Collateralized) Stablecoins

• Definition: These stablecoins are backed one-to-one by tangible, high-quality assets held in reserve—typically cash, government securities, or other liquid instruments.
• Mechanism: For every coin issued, there is an equivalent amount of the pegged asset held in custody. This ensures that users can redeem their tokens for fiat currency at a fixed rate, maintaining stability and user trust.

2. Algorithmic Stablecoins

• Definition: These coins are not supported by actual reserves but rely on pre-programmed algorithms to keep their value stable.
• Mechanism:
  • When the coin’s price rises above its target value, the algorithm issues more tokens to increase supply.
  • When the price falls below the peg, the system removes tokens from circulation to reduce supply.
    This self-adjusting mechanism helps maintain price equilibrium without physical collateral.

Key Features and Advantages

• Price Stability: Designed to minimize volatility, stablecoins are suitable for trade, payments, and as a safe asset within the crypto ecosystem.
• Transaction Efficiency: They enable instant and low-cost transfers, particularly across borders, reducing reliance on traditional intermediaries.
• Programmability: Being digital and blockchain-based, stablecoins can be easily integrated into smart contracts and decentralized finance (DeFi) systems, automating financial operations.
• Digital Representation of Fiat: They serve as a blockchain version of national currencies, facilitating real-time settlements and bridging traditional and digital finance.