Stablecoins are a sort of cryptocurrency that is connected to a relatively stable asset, such as the US dollar.
The usd is the reference asset for the most majority of the dozens of stablecoins now in existence, although several are also tied to government-issued fiat currencies like the euro and yen. As a result, unlike high-profile cryptocurrencies like bitcoin and ethereum, which are prone to sharp ups and downs, the price of stablecoins changes extremely little.
Tether was the first stablecoin, founded in 2014, and several subsequent stablecoins are modeled after it. For every dollar deposited, users receive one token. The tokens can then be converted back into the original currency at any time at a one-to-one exchange rate, in theory.
Tether had a market capitalization of around US$62 billion as of July 28, 2021, or slightly more than half of the $117 billion market capitalisation of all stablecoins worldwide. The second-largest cryptocurrency is USD Coin, which has a market capitalization of around $27 billion.
Why are stablecoins important:
Because many cryptocurrency exchanges lacked access to traditional banking, stablecoins were initially used to buy other cryptocurrencies like bitcoin. They are more helpful than country-issued currencies since they can be used anywhere in the world, 24 hours a day, seven days a week, without relying on banks. Money transfers are completed in a matter of seconds.
Another advantage of stablecoins is that they may be used with blockchain-based smart contracts, which, unlike traditional contracts, do not require legal permission to be executed. The parameters of the agreement, as well as how and when money will be transferred, are automatically dictated by the software code. Stablecoins can be programmed in ways that dollars can't.
Stablecoins are being used in lending, payments, insurance, prediction markets, and decentralized autonomous organizations (companies that function with little or no human interference) thanks to smart contracts.
Decentralized finance, or DeFi, is the umbrella term for various software-based financial services.
Stablecoins, according to proponents, are faster, cheaper, and easier to integrate into software than fiat cash.
Others argue that a lack of regulation puts financial systems at danger. Economists Gary B. Gorton and Jeffery Zhang compare today's situation to the mid-nineteenth-century era, when banks issued their own private currencies. They believe stablecoins would produce the same difficulties as in the past, when people couldn't agree on the value of privately issued currencies, resulting in periodic runs.
Regulators have recently become more interested in stablecoins, fearful that they could represent a risk to the financial system.
Source: The Conversation US publishes concise, easy-to-understand explanations of current events.
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