ELI5 Stable Coins - how do they work?

What are stable coins and why do we even need them? What’s the mechanism that makes them stable? What are the different types of stable coin? How did the algorithmic stable coin Terra work, and why did it unravel?

... we explain like I'm five

Thank you to the r/explainlikeimfive community and in particular the following users whose questions and comments formed the basis of this discussion: fihaal42, tehwildman_, enough_blueberry_549, sleep_naked, red_atnight and lawproud492.

Some extra resources:

https://medium.com/@lawrenceg/what-are-stablecoins-and-why-do-we-need-them-db83c85b86b

https://multicoin.capital/2018/01/17/an-overview-of-stablecoins/

https://en.wikipedia.org/wiki/Stablecoin

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