A stablecoin is a cryptocurrency pegged to the price of another asset in order to reduce volatility — for example, USDC is pegged to the price of the US dollar.
Stablecoins are useful for reducing risk for traders — a trader might cash out of Bitcoin into USDC to try and avoid a price dip, and this is often cheaper and faster than actually selling Bitcoin for the US dollar.
Types of Stablecoins
Most stablecoins require collateral to remain stable, and they can be collateralized with fiat, crypto, or commodities.
Fiat-backed stablecoins include Tether (USDT) and USDC, and they are backed 1:1 with a dollar per crypto token.
There are also stablecoins backed with commodities like gold, meaning their price is correlated to the price of spot gold.
Finally, there are non-collateralized stablecoins whose price is managed by algorithms constantly adjusting the supply to keep price level. DAI is an example of a non-collateralized stablecoin.