What exactly are stablecoins? An expert in blockchain explains

What exactly are stablecoins? An expert in blockchain explains

Stablecoins are a sort of cryptocurrency that is connected to a stable asset, such as the US dollar.

The bulk of the hundreds of stablecoins now in existence utilize the dollar as its benchmark asset, but several are also tied to government-issued fiat currencies such as the euro and yen. As a result, unlike high-profile cryptocurrencies such as bitcoin and Ethereum, the price of stablecoins is expected to change extremely little.

Tether, the first stablecoin, was introduced in 2014 and serves as the model for many additional stablecoins. Users receive one token for every $1 deposited, users earn one token. In principle, the tokens may then be exchanged for the original currency at any moment at a one-for-one conversion rate.

As of May 11, 2022, Tether had a market capitalization of roughly US$83 billion, which was slightly less than half of the $172 billion market capitalization of all stablecoins globally. The next-largest is known as the USD Coin, with a market capitalization of around $49 billion.

Why are stablecoins important?

Stablecoins were first used to purchase other cryptocurrencies such as bitcoin because many cryptocurrency exchanges did not have access to regular banks. They are more helpful than country-issued currencies since they can be used anywhere in the globe, 24 hours a day, seven days a week - without relying on banks. Money transfers happen in a couple of seconds.

Another advantageous characteristic of stablecoins is their ability to interact with so-called smart contracts on blockchains, which, unlike traditional contracts, do not require legal permission to be implemented. The software's programming automatically determines the conditions of the agreement, as well as how and when money will be distributed. Stablecoins may thus be programmed in ways that dollars cannot.

Smart contracts have paved the way for stablecoins to be used not just in frictionless trading but also in loans, payments, insurance, prediction markets, and decentralised autonomous organizations - firms that function with little human interference.

These software-based financial services are referred to as decentralised finance or DeFi.

Proponents argue that using stablecoins to transfer money is faster, cheaper, and easier to integrate into software than using fiat currency.

Others argue that a lack of regulation puts the financial system in danger. Gary B. Gorton and Jeffery Zhang, economists, make a comparison to the mid-nineteenth-century era when banks produced their own private currencies in recent work. They believe stablecoins would generate the same issues that occurred during that period when there were regular runs because individuals couldn't agree on the value of privately issued currencies.

A reminder of those risks came in May 2022 as a so-called algorithmic stablecoin is known as TerraUSD, or UST plunged in value. To keep their peg, algorithmic stablecoins employ a sophisticated method of burning or producing tokens for profit.

As a result of these issues, regulators have taken a greater interest in them recently.