If you pay attention to the cryptocurrency world, then you have likely seen references to stable coins. But that does not necessarily mean you understand what they are or why they matter. With a quick overview and some examples, you should fully understand the idea behind stable coins.
The Definition
Stable coins are currencies designed to hold stable values. To achieve that goal, they are pegged to a stable asset in most cases. This can be a fiat currency like the U.S. dollar or another type of asset like gold that is considered stable. Stable coins overcome the volatility of cryptocurrencies. At the same time, they are not connected to a central bank like fiat currencies. Instead, they are global.
Most stable coins in existence today fit one of two categories: asset-backed or based on an algorithm. The asset-backed stable coins are those that hold their value by being pegged to USD, gold, or another asset. An asset-backed stable coin will always aim to hold a 1:1 ratio for its pegged asset.
The other type of stable coin has an algorithmic mechanism to keep it stable. These will have rules built into their code that try to ensure supply and demand for the token remain similar. While harder to employ, algorithmic stable coins tend to be more scalable and have stronger incentives for network adoption. It also tends to be easier to earn profits when creating the coins.
Traits of a Good Stable Coin
There are many stable coins, but experts agree that an ideal one will have price stability, decentralization, privacy, and scalability. It must also be simple to use and work with exchanges to encourage adoptability.
Why They Matter
It is no secret that cryptocurrencies are incredibly volatile. Bitcoin is the classic example. In 2017 alone, the price of one went from $1,000 to nearly $20,000. At the time of writing, it is back down to around $4,000. This type of volatility is extreme but not unusual. Experts estimate that coins can decrease or increase between 10 and 20 percent in value in just a single day. This type of fluctuation leads to a lack of stability, causing doubts. Transactions are also inconvenient due to volatility potentially causing massive fluctuations in price during transactions.
The idea is that a stable coin is able to provide the advantages of a cryptocurrency without people having to worry about the volatility. This way, there is no need to worry about restrictions, regulations, or centralization.
Examples of Stable Coins
The most famous of all stable coins is Tether, USDT. The symbol for this crypto clearly indicates that it is pegged to the USD. The design of Tether is for it to be equal to $1 USD. There are also several other famous stable coins. Within the top 50 cryptos, you will also find TrueUSD, USD Coin, Paxos Standard Token, and Gemini Dollar.
When evaluating a stable coin, check if it is transparent and if it clearly shows that the alleged backing by an asset is real.