Stable coins: what are they?

Stable coins: what are they?

Similar to a fiat currency like US dollars, Stablecoins are a particular category of digital coin or cryptocurrency that has been already linked to an asset, and the value of these coins does not rapidly change like the other cryptocurrencies. 

US dollars, yen and euro are usual assets that are currently being used to link these stablecoins as their benchmark asset. Therefore the value of these currencies fluctuates in a marginal value, and exactly at this point, these coins differ from the top cryptocurrencies like Bitcoin, Ethereum, etc.

Tether was the first stablecoin that was introduced in the crypto world. Later on, other cryptocurrencies have been modelled after this particular crypto coin. Against every dollar the users’ deposit, they receive a token. This way, the tokens can be exchanged for fiat currency anytime the user wants to and at a one-for-one exchange rate.

What stablecoins brings to the crypto market

The original purpose of introducing stablecoins was to buy the other digital coins available in the market. Many crypto exchange platforms didn’t have the service of exchanging paper currency through banks. The plus point of using stablecoins is that they are practically more useful than country-issued currencies because the users of this coin can utilize the token anytime, anywhere in the world, without requiring any kind of help from the bank. Transferring money takes only a few seconds.

Stablecoins can also work with smart contracts, and these contracts do not require any authority to be executed. The pre-existing codes in the software automatically execute the tasks based on the terms of the agreement of how and when money will be transferred. This makes stablecoins the most efficient coins and more useful than paper currency. 

Smart contracts have played a big role in the rise of stablecoins. Due to smart contracts, stable coins not only have gained the upper hand in seamless trading but also in payments, insurance, lending, market prediction and in those businesses that operate with limited human interference. All of these blockchain technology-based financial services together are named Decentralized Finance or DeFi. Compared to transferring money via fiat currency, using stablecoins are much cheaper, faster and easier.

Some people are also criticizing the decentralized financial system by saying that the lack of regulation may create a huge problem later on. Famous economists like Gary B. Gorton and Jeffery Zhang are comparing stablecoins with the private banknotes issued by 19th-century private banks. They have said that stable coins can create the same issues observed in that era.

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