Stablecoins, as we know, are pegged to sufficient reserves to collaterize themselves. There are generally three ways to collaterize a stablecoin.

First of all, stablecoins are collaterized by fiat. In other words, these are supported by real assets in reserve. For every stablecoin, there should be equivalent in real currency in assets.

Secondly, cryptos are collaterized with other cryptos, though price volatility remains an issue. This is compensated by over-collaterization, e.g. one stablecoin is pegged to $2 dollar worth of crypto. It is a hedge against the volatility of the cryptos.

Thirdly, cryptos are not linked to any reserve, but make use of smart contracts to monitor price fluctuations and programmes to issue and buy coins accordingly.

A smart contract is a computer programme that responds to external events automatically. Execution of smart contract could result in the exchange of money, delivery of services or other type of transactions.