A stablecoin is a type of virtual money that is linked to a reliable reserve asset, such as gold or the US dollar. They are designed to reflect the value of the underlying asset 1:1. The purpose of stablecoins is to lessen volatility in contrast to unpegged cryptocurrencies like Bitcoin.
Because stablecoins' values are based on a reserve asset, such as the US dollar or gold, they serve as a link between the worlds of cryptocurrencies and conventional fiat money. In comparison to something like Bitcoin, this significantly lowers volatility and produces a digital currency that is more appropriate for daily transactions as well as cross-exchange transfers.
It has shown to be a very popular concept to combine the permanence of traditional assets with the flexibility of digital assets. Stablecoins like USD Coin (USDC), which have grown to be some of the most well-liked methods to store and exchange value in the cryptocurrency ecosystem, have seen a value inflow of billions of dollars.
Why do stablecoins matter?
For instance, the USDC stablecoin is backed by dollar-denominated assets in segregated accounts with US-regulated financial institutions that have a minimum fair value equivalent to the USDC in circulation. An impartial accounting company attests to (i.e., publicly verifies) these accounts. This way, everyone knows that each USDC is worth 1 US dollar.
The Ethereum blockchain is now used by USDC, along with many other stablecoins. While retaining some of the most potent characteristics of non-pegged cryptocurrencies, stablecoins are immune from their volatility.
Stablecoins are available to everyone on the internet, everywhere, and at any time.
They are inexpensive, quick, and safe to send.
They can be programmed and are digital natives of the Internet.
What do stablecoins let you do?
Reduce price fluctuations while maintaining a foothold in the cryptosphere. Cryptocurrency values, such as those of Bitcoin and Ether, are very volatile, often changing by the minute. Buyers and sellers can feel more certain that the value of their tokens won't soar or fall suddenly in the near future if the asset is linked to a more stable currency.
Swap or hold onto assets. Stablecoins can be held without a bank account and are simple to move. The value of stablecoins can be transferred readily over the world, even to locations where it may be difficult to obtain US dollars or when the local currency is unstable.
Get rewards from lending platforms or protocols. There are simple ways to profit from stablecoin investments, usually at a rate higher than a bank would. The execution is much easier and more readily available for individuals than in traditional finance.
Send money at a low cost. Depending on the blockchain’s conditions at the time, users can transmit even a million dollars' worth of USDC for less than $1 in transfer costs - this would be impossible with any bank or anywhere in traditional finance.
Transmit globally. Since crypto currencies are not tied to any nation or jurisdiction, they can readily be sent to any place in the world.
Stablecoins provide an excellent way to minimize crypto market volatility while retaining all of the benefits of cryptocurrencies, such as low cost and permissionless transactions.