Synthetic Stablecoin

Definition ∞ A synthetic stablecoin is a digital asset designed to maintain a stable value relative to a target asset, such as a fiat currency or commodity, without holding the actual underlying asset in reserve. Instead, its stability is maintained through a combination of algorithmic mechanisms, collateralization with other cryptocurrencies, and incentives for arbitrageurs. These stablecoins are created through decentralized protocols. They offer exposure to traditional asset values within the digital asset ecosystem.
Context ∞ Synthetic stablecoins are a prominent feature in decentralized finance, often discussed for their capital efficiency and censorship resistance compared to fiat-backed alternatives. News reports frequently analyze their stability mechanisms and the risks associated with their algorithmic or crypto-collateralized designs. Current debates focus on the robustness of their peg during market volatility and the effectiveness of their governance structures in maintaining solvency and value.