Stablecoins are a new type of cryptocurrency that have their value pegged to another asset.
These coins can be pegged to fiat currencies such as the United States dollar, other cryptocurrencies, precious metals or a combination of the three.
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.
In December 2018, Cointelegraph reported claims that four major stablecoins had clocked up $5 billion in on-chain transactions within just three months — enjoying a 1,032% surge in November compared with two months earlier.
stablecoins are designed to have a consistent price or value over time - delivering a happy medium between offering the stability of fiat currencies and the decentralized benefits that virtual currencies provide.
There are three different ways of achieving this —
1. collateralized by fiat. For every single stablecoin issued, $1 is kept safely by a central custodian such as a bank.
2. collateralized by crypto. help to keep decentralization alive, with crypto reserves absorbing the impact of any fluctuations, but a downside is that huge amounts of capital can be required to get them off the ground.
3. noncollateralized stablecoins, which do away with the idea of having reserves altogether. These types of assets see smart contracts take on a role not too dissimilar to a reserve bank. They monitor supply and demand — buying circulating coins when prices are too low and issuing new ones when prices are becoming too high. The ultimate goal is to keep prices in line with that of a pegged asset such as the U.S. dollar.
stability is more of an aim than an inseparable feature.
Stablecoins give owners a safe place to store their assets whenever there are choppy waters in the crypto world. Consumers can quickly and easily convert from unpegged 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.
greater levels of self-governance would give peace of mind to users, help tokenize the global economy and result in a joined-up ecosystem for the crypto industry that would pose a more compelling alternative to fiat.
the fact that pegged stablecoins will offer little to no financial gain is likely to be regarded as a major downside by some.
Notes taken from https://cointelegraph.com/explained/stablecoins-explained
