A stablecoin, just like the name implies, is simply a digital coin that is stable. A coin whose price does not fluctuate. It is a type of cryptocurrency whose value is pegged at a decided ratio to a real-world asset with an almost entirely definite value.
The most popular type of stablecoins – fiat stablecoins – are often pegged to a prominent fiat currency such as the US Dollar in a 1:1 ratio. Thus, if 1000 stablecoins are backed by $1000 in a reserve, their value only ideally fluctuates when the price of the US dollar rises or falls. Other types of stablecoins which are “on-chain” and are not backed by physical coins are often maintained by smart contracts and more complex algorithms.
The first ever serious stablecoin was proposed in 2014 by mathematician Robert Sams as a solution to the high volatility of BTC, ETH, and other cryptocurrencies which were gradually gaining popularity and much-needed credibility. Sams detailed in his paper a mechanism for creating a new coin, which would involve tying the coin to a benchmark asset, and keeping track of the price on an exchange.
Sam’s paper, titled “A Note On Cryptocurrency Stabilization; Seigniorage Shares”, has since gone on to define subsequent algorithms and processes that currently make the stablecoin niche in the crypto space what it is now.