Stablecoins are price-stable cryptocurrencies designed to maintain a peg with another stable asset.
They are most commonly used as decentralized equivalents to FIAT currencies, such as USD or GBP.
Cryptocurrencies like Bitcoin are historically volatile in their prices. Which for investors/traders can be seen as a good thing and even sometimes welcomed as it creates the possibility for high returns.
But this volatility is one of the critical barriers to the adoption of cryptocurrencies. The more volatile an asset is the more risk that comes with it.
In any economic transaction, stability is key. Businesses and consumers don’t want to be exposed to unnecessary currency risk when transacting cryptocurrencies.
A great example would be if your boss were to pay your wages in bitcoin. Let’s say you are meant to get paid $2000 a month, and you get that in bitcoin. Given the volatility, the purchasing power of your bitcoin could be worth the equivalent of $1750 or $2250, depending on the day (numbers plucked out of thin air).
Even with the upside potential, I think it’s safe to say most people will prefer to receive $2000 guaranteed rather than risk getting less.
Stablecoins present an interesting alternative to the volatility problem due to Stablecoins being designed to maintain a peg with another “stable” asset, like the USD.
E.g., 1 USDC = 1 USD, meaning back to the wages example, if you were to get paid 2000 USDC, it would be and always would be worth $2000.
Hypothetically speaking, if the stablecoin were to keep its peg, it would solve the volatility problem.
As they eliminate the need for substantial transaction fees and time delays that are typical when making payments with existing methods, Stablecoins could drive greater adoption in the “real world”.
