Advantages of stablecoins
Stablecoins have many advantages over fiat and other cryptocurrencies. First, they bring the stability of fiat currencies to the blockchain, meaning they are more secure and more transparent fiat coin issuances that can interact with applications built on the blockchain.
Stablecoins can be used as currency and are cheaper to make transactions than traditional fiat currencies and are available in a network of applications that offer higher interest rates than savings accounts. In blockchain-based applications, stablecoins holders can also receive loans backed by their coins.
Stablecoins make “cross-border” payments faster and cheaper and can be easily traded with fiat currencies on exchanges, as they are widely accepted on trading platforms since they have high liquidity.
Disadvantages of stablecoins
The main disadvantage of stablecoins is counterparty risk. This risk describes the probability of default of another party involved in an agreement. In this case a stablecoin issuer may not have the reserves it claims to have and refuse to redeem its tokens.
In times of market turbulence or failure to carry out controls can also lead to risk premia. Risk premia represent the additional compensation that investors receive for the additional risk of investing in an asset. Risk premia reduces the value of stablecoins compared to their commitment, which means that buying cryptocurrencies with stablecoins becomes slightly more expensive than with fiat currencies.
Finally, central entities issuing tokens may have the authority to freeze them at addresses upon request from law enforcement authorities.