Blockchain-based fiat currency
Stablecoins are a class of cryptocurrencies that try to offer investors a fixed price whether they are backed by specific assets or by using algorithms to adjust their supply based on demand.
The first stablecoin was launched in 2014 and has since attracted attention, as stablecoins offer the speed and security of a blockchain while getting rid of the volatility that most cryptocurrencies suffer.
Stablecoins were mainly used in the cryptocurrency market on exchanges that did not offer fiat trading pairs. As their adoption increased, stablecoins are now used in many blockchain-based financial services, such as lending platforms, that can be used to pay for goods and services.
Stablecoins are a type of blockchain-based fiat currency, which means they are programmed and can interact with blockchain-based applications and smart contracts.
Understanding Stablecoins
Popular cryptocurrencies like Bitcoin and Ethereum tend to “suffer” from high volatility. High volatility means that the price of an asset can fluctuate excessively over time in either direction as opposed to non-volatile currencies (stablecoins).
The most obvious advantage of stablecoin technology is that it can be used as a medium exchange, bridging the gap between fiat currencies and cryptocurrencies. Stablecoins are stable assets, encouraging their adoption in regular trading and increasing the mobility of cryptos around the ecosystem and the market.
The value of most stablecoins is tied to the value of a particular fiat such as the United States dollar. Stablecoins also stand out because they are based on blockchain, because they enable their holders that the price will not change and they can use them to buy goods and services.
Unlike traditional crypto assets, their value is tied to a specific currency or commodity. By far, most stablecoins are pegged to the US dollar. For example, the Tether US Dollar (USDT) is the largest stablecoin in terms of market capitalization. 1 Tether USD tends to remain in value exactly 1 US dollar.
There are also those associated with the price of gold or euros. Since they are tied to the value of actual assets, stablecoins remain mostly unaffected by any market changes in the general crypto market. Most of these coins act as tokens on a different network – many of them are found on the Ethereum blockchain known as ERC20 tokens.
Some stablecoins are supported 1 to 1 by whatever they represent. For example, some issuers of fixed currencies pegged to the US dollar would themselves hold 1 dollar for each coin they have created.
But why Stablecoins?
There are many reasons why stablecoins can be interesting. Below we will mention one – two possible reasons why someone might want to use stablecoins:
Trading
First, for traders it may be interesting to change their cryptocurrencies into stablecoins if they expect prices to drop. By trading their volatile crypto assets into stablecoins, the impact of plummeting prices could be limited in such a scenario. They could then acquire a larger number of crypto assets in exchange for their stablecoins.
Disclaimer: Trading can be dangerous and lead to losses. We strongly recommend that you do your own research and do not provide financial advice.
Economic independence
Not everyone involved in cryptos cares about the risks that high volatility could bring. There are those who want to enjoy the financial independence that crypto assets offer. This includes elements such as decentralization, being responsible for your own money, and having complete freedom of choice with them without having to take into account price fluctuations.