Definition
Stablecoins are cryptocurrencies that are pegged to another stable asset like the U.S dollar or gold. This gives them relative stability compared to other cryptocurrencies like Bitcoin that can have volatile price fluctuations.
Stablecoins are so-called because they are considered comparatively stable assets in the crypto ecosystem. Just like traditional assets such as gold and fiat currencies like the U.S dollar, their price does not fluctuate as much as other cryptocurrencies. However, stablecoins are also a cryptocurrency, so they have the flexibility that a digital asset provides. For these reasons, they have proven to be very popular with investors. Billions of dollars of value have flowed into stablecoins like USD-Coin (USDC) and USD-Tether (USDT) as their usefulness is recognised.
Why use stablecoins?
What makes stablecoins, stable? USDC, for example, is not only pegged to the U.S. dollar, but is also fully backed by it and can be traded for the U.S. dollar on a one-to-one ratio on most exchanges. Most stablecoins operate on the Ethereum blockchain via the use of smart contracts. While stablecoins inherit the advantages and functionalities of cryptocurrencies, they do not have their exposure to volatility.
- Stablecoins can now be found on most good exchanges. They are also open-source meaning they are accessible by anyone.
- They are secured by blockchain technology, just like any other cryptocurrency.
So, how do you use them?
- One of the most common uses for stablecoins is sending money internationally. Since it is a cryptocurrency, it is fast, secure and has very low transaction fees. And importantly, a bank or financial institution is not required for the transaction to take place.
- Since cryptocurrencies like Bitcoin and Ethereum fluctuate in value a lot, stablecoins are used as a sort of temporary financial sanctuary for your assets. They can be relied upon for their stability during unpredictable and turbulent market fluctuations.
- As a bank or some other financial institution is not required to hold stablecoins, you are free to trade and save as you see fit, without being subject to fees or banking regulations. This is especially useful for people living in countries with unstable local currencies and economies.
What’s under the hood?
- Stablecoins are essentially smart contract backed tokens on a blockchain. Ethereum is the most commonly used network for stablecoins. Their stability comes from a trusted asset backing them up on a one to one ratio. Sometimes, this asset is gold, sometimes a fiat currency like the dollar, and sometimes it’s another cryptocurrency.
- USD Coin (USDC) is backed by the U.S dollar, which is stored at financial institutions. Monthly audits ensure the relationship is maintained at a one to one ratio giving investors confidence in it’s stability.
