What is their utility?
The fact that they are based on blockchain, stablecoins provide various possibilities to their holders. The first stablecoins were issued as currency replacements on various exchanges and gave investors a safe haven away from the high volatility of other crypto assets.
Stablecoins can be used to borrow, for interest rates better than those offered by traditional savings accounts, or to obtain loans backed by cryptocurrencies in the decentralized finance (DeFi) space. While stablecoins may earn higher returns than traditional savings currencies, it is important to note that stablecoins offerings do not provide any government-backed insurance.
Non-changing currencies have been issued on various blockchains that support smart contracts and are used throughout the DeFi (Decentralized Finance > Decentralized Economy) space and on exchanges. Blockchain networks that support smart contracts enable the creation of applications (dApps) such as decentralized exchanges (DEXs) on them. Decentralized exchanges are marketplaces where traders are traded.
Stablecoins are also useful for paying salaries in cryptocurrencies, as they make it cheaper to move money within the network as opposed to the borders we have. Only an amount must be paid for the commission of transferring funds to the blockchain network. These transactions settle faster on the blockchain, lasting from a few seconds to an hour, depending on the factors. These factors include the type of network used, the potential congestion that the network has at the time of the transaction, the amount to be paid as a commission, and the cluster of transactions.
How do stablecoins remain stable?
Fiat currencies issued by central authorities remain stable by actions such as central banks, which ensure that currency prices remain stable. Stablecoins can be backed by a physical commodity such as gold, algorithms or by fiat currencies issued by the government.
Stablecoins take advantage of the stability provided by central banks and the government to build up reserves in government-backed fiat currencies, such as the United States dollar. Stablecoins are held steady through a few basic mechanisms such as fiat support for currencies, cryptocurrencies, algorithms, etc.
Fiat-backed stablecoins
Stablecoins backed by fiat currencies, hold stocks of currencies in fiat form such as the United States dollar.
Stocks of stablecoins are held by central entities that regularly check their funds and work with regulators to ensure they have stocks of stablecoins. So they can buy stablecoins directly from the publishers, but users must go through KYC (Know Your Customer) and AML ( Anti-Money Laundering) as in exchanges. These procedures include the collection of users’ personal information, including a government-issued ID.
Once in circulation, anyone can send and receive stablecoins however the central entity that issues them has the ability to freeze the money at addresses as has been done in the past trying for example to recover stolen funds.