What are stable coins?
January 26, 2023
Stablecoins are stable assets that can be used as a good store of value and can be safely adopted into regular transactions. They typically have their value tied to other coins, goods, gold, and even traditional currencies.
Stablecoins provide a less risky alternative to storing money on the blockchain and enable payments between individuals and institutions, as opposed to the extreme volatility of most cryptocurrencies like Bitcoin and Ether.
Volatility here refers to the level of uncertainty in the price of the coin. A high level of volatility means the price of the coin can swing in either direction (high or low), but a low level of volatility means the price of the coin is relatively stable.
The first stable coin was issued in 2014, but they have since been adopted as a staple in the world of cryptocurrency because they offer the convenience, privacy, and security of cryptocurrency while also offering the stability and trust of fiat money (traditional money, e.g., the U.S. dollar). Stablecoins were initially used to buy cryptocurrencies on trading platforms that did not allow for fiat currency trading pairs, but they have since grown to be used as a method of paying for goods and services.
Stablecoins also help with the movement of crypto coins in the ecosystem and offer security to their holders. This security comes from knowing that the purchasing power of the stablecoins won’t change erratically.
Because the price of the stablecoin is fixed to the fiat currency it represents, e.g., dollar, 1 stablecoin will be directly equal to 1 US dollar. The fixed price of the stablecoin is maintained by several methods. The most common is the asset-backing method. Meaning, for every stablecoin, there is an equivalent amount in dollars backing it, i.e., 1 stablecoin for 1 US dollar.
Now that we’ve covered what they are, you can go ahead and read up on the different types of stable coins and what they can be used for in this article.