If you’ve read news lately on cryptocurrency or overheard conversations about it, you’ve probably come across the term “stablecoin.” Maybe you’ve wondered what stablecoins are or how they’re different from other types of cryptocurrencies. Let’s break it down.

First, a quick refresher: Cryptocurrency is a kind of online money that isn’t controlled by a government or a bank. Instead, it’s decentralized, meaning it’s managed on the internet, by networks all over the world. When people buy, sell or complete transactions with cryptocurrency, those actions are recorded in a public ledger.

So, what makes stablecoins unique compared with other cryptocurrencies? The clue is in the name: stable.

“Unlike the values of most cryptocurrencies, which can be highly volatile, stablecoins’ value is intended to be ‘stable,’ since they are typically backed one-for-one by highly liquid reserves such as deposits, money market funds or U.S. Treasury bills,” explains Todd Mackey, senior vice president of Payments and Strategy at the Kansas City Fed.

In other words, you could think of stablecoins as a digital form of cash. Even so, stablecoins are not yet poised to surpass traditional currency in popularity.

“At this time, stablecoins are primarily used on decentralized finance exchanges as trading assets, which is exactly what they were created originally to do,” Mackey says. “There is also a considerable amount of stablecoins being utilized as a store of value in digital wallets, often as a hedge against inflation internationally. Only a small fraction of stablecoins is used to make payments today, though that could change in the future.”

Because the role of stablecoins is evolving, governments, regulators and major financial institutions are watching closely. Discussions are also ongoing about how government-issued stablecoins (also known as central bank digital currencies) might work in the future. By staying informed about cryptocurrencies and financial technology, you’ll be better equipped to make smart financial choices for yourself, your business and your family.

Interested in digging into some of the Kansas City Fed’s research on stablecoins? Check out these articles:

The views expressed are those of the authors and do not necessarily reflect the positions of the Federal Reserve Bank of Kansas City or the Federal Reserve System.