You might have noticed news outlets heavily mentioning this new buzzword on the block(chain), among many others in the crypto space. Stablecoins are, by definition, a specific type of cryptocurrency that’s linked to a particular asset, usually the U.S. dollar. The asset that serves as a safety net for these tokens is typically stable, without wild fluctuations in value.
Dozens of stablecoins exist so far, and the majority of them use the dollar as their benchmark asset. Of course, some of them are pegged to different types of governmentally issued fiat currencies, like the Euro or Japanese Yen. The result is a coin that has little to almost no fluctuations, thus carrying the name stablecoin. Unlike highly fluctuating crypto all-stars Bitcoin and Ethereum, stablecoins serve as a counter option for those who want a safer storage place for their crypto funds.
The History of Stablecoins
The very first stablecoin was created back in 2014 and was named Tether. Many others are modeled after it, just like with Bitcoin and other cryptocurrencies. For every deposited dollar, you receive one token, and in theory, these tokens can be changed back to their fiat counterpart at any time, at a one-for-one exchange rate.
As of mid-2021, Tether market circulation was somewhere around $62 billion, while the entire stablecoin market cap is pin-pointed approximately at $117 billion worldwide. In the large ocean of stablecoins, the next one in line, by size, after Tether is known as the USD Coin, with a market capitalization of $27 billion.
The Importance of Stablecoins
The original idea behind stablecoins was to buy other cryptocurrencies, and this was because, back then, many crypto exchanges didn’t have traditional banking access. However, you might ask, why are they useful if backed by a traditional currency, which is entirely avoided with cryptocurrencies in general?
Well, they can be of greater use than a country-issued currency because of their accessibility. They can be used 24 hours a day, seven days a week, and in the entire world, regardless of your whereabouts. Money transfers are easy and take mere seconds. With stablecoins, relying on banks is the thing of the past.
So far, we can conclude that stablecoins pick up the best features of cryptocurrency on one side and traditional currency on the other. This leads to another convenient crypto feature of stablecoins: it can work with smart contracts on the blockchain. Again, no legal authority is needed for their execution. The software code immediately dictates the terms and conditions of the agreement, thus making money transfers possible. This means that stablecoins are also programmable, unlike the regular U.S. dollar or any other traditional currency for that matter.
To summarize, stablecoins are the best of both financial worlds. The constant stability of regular or fiat currency for backup and the amazing accessibility and third-party hassle avoiding of cryptocurrencies mix into this fantastic investment opportunity called stablecoin.
Although there’s a rising concern and risks associated with them, they seem to cover the ongoing crypto regulation concerns with a bandaid. Nonetheless, despite the risks, we can only look forward to seeing this new trend unfold, but stablecoins are a great idea to explore and invest in for now.