What Are Stablecoins?
Cryptocurrencies like bitcoin (BTC) are quite volatile. This price volatility limits how well cryptocurrencies can function as money. After all, why would you want to be paid in bitcoin, for example, when its price could drop at any moment? Enter, stablecoins.
Stablecoins are a type of cryptocurrency. They’re designed to maintain a stable value. The value of most stablecoins is pegged to a collateralising asset or basket of assets. Because of this peg, the price stability of stablecoins is far better than bitcoin and many other cryptocurrencies.
Examples of stablecoins are USDC, USDT and DAI.
How Stablecoins Are Used
- Safety exit for crypto investors. Stablecoins usually rises when the crypto market is performing poorly. That’s because crypto investors use stablecoins as a safe harbour. When markets turn sour, they sell into stablecoins. This is usually cheaper and faster than selling into fiat.
- Faster and cheaper remittance. Because stablecoins maintain parity, they’re better at functioning as a medium of exchange than other cryptocurrencies. Being built on blockchain technology means stablecoins are a lot faster and cheaper to send than a bank wire.
- Stablecoins and dApps. Pairing smart contract technology with price-stable cryptocurrencies allows dApp developers to build better solutions. The DeFi space, for example, wouldn’t be where it is today had it not been for stablecoins.
- Financial inclusivity. Censorship-resistant stablecoins offer a much-needed alternative for those living in countries with bad monetary systems and tight capital controls.
Read: What Is DeFi?