Stablecoins are cryptocurrencies designed to minimize the volatility of the price of the stablecoin, relative to some “stable” asset or basket of assets. A stablecoin can be pegged to a currency, or to exchange traded commodities.
Examples of the best-known stablecoins include
Demand for such coins has been growing. Stablecoins are designed to tackle the inherent volatility seen in cryptocurrency prices. They are normally collateralized, meaning that the total number of stablecoins in circulation is backed by assets held in reserve. Put simply, if there are 500,000 USD-pegged coins in circulation, there should be at least $500,000 sitting in a bank.
Stablecoins give owners a safe place to store their assets whenever there might be turbulence in the crypto world. Consumers can quickly and easily convert from cryptocurrencies to stablecoins when they are worried about where the markets are heading next, eliminating the need to return to a fiat currency. These conversions can also be less expensive than when switching between crypto and fiat, as it takes the transaction fees of payment processing providers and banks out of the equation.
Everyone — from banks to social networks — is getting in on the action. Facebook and J.P. Morgan are getting in on stablecoins. Elsewhere, IBM has launched its blockchain-powered World Wire in collaboration with Stellar (issuer of XLM) — also with the goal of building a cross-border payments network. Here, international banks can create their own stablecoins backed by their local fiat currency — and institutions from Brazil, South Korea and the Philippines have reportedly registered their interest so far.
There are four features that a cryptocurrency needs in order to become global, fiat-free, digital cash:
- Price stability
- Scalability
- Privacy
- Decentralization (i.e. collateral is not held by a single entity, like Tether)
None of the current stablecoin projects have all of these features, but some are aiming to offer all of these. Scalability and privacy are likely further out. But stable, decentralized crypto-assets are possible today.
Stablecoins can play a significant role in the future development of cryptocurrencies and blockchain technology in general. The key feature for the companies here would be operating in the most transparent way possible.
I am learning of many new things around blockchain technology, and I will continue to share as I learn them! So many exciting new things on the horizon!