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As cryptocurrencies like Bitcoin, Ethereum, and others have gained popularity over the past few years, the rise of stablecoins has too. People are looking for a bridge between the old fiat based systems of yesterday, into the future of digital currencies; but they don't want the volatility that goes along with it.
Just as the given name implies, stablecoins are intended to have a stable or consistent value. Such as the dollar, a stablecoin can hold it's value over long periods of time. Stablecoins are not full-fledged cryptocurrencies, but they certainly aren't dollars either which are typically backed by a government and their military.
Stablecoins are the bridge to both types of currencies that was introduced a few years ago. The idea is to peg a cryptocurrency to the dollar, so the stablecoin is backed by the dollar, but can move fast and work like a cryptocurrency, but without the volatility.
While the monetary policy of Bitcoin might make it an attractive speculative investment, the current utility as a unit of account is dubious. When there is a limit on supply, and you have high demand, you introduce volatility. This can be good for speculators who want to see return on their investment, but it also spells bad news for those who invest but there isn't enough demand, which then drives the price down. With volatility, it introduces irregularities and risk for all parties involved.
Users of a currency want to be confident that the money they have today can be exchanged for roughly the same value of goods and services tomorrow.
The pros of stablecoins
Now that we have established why stablecoins may be desirable to some people, let's take a closer look at some of the advantages of using them.
The most well known stablecoin is USDT (Tether). USDT is available on almost every single crypto exchange in the world, and used a base pair to trade with. It gives users the ability to have an onramp to crypto and an offramp from crypto without having to convert to dollars (which can be a taxable event). As stated above, it also has it's stability in price so it holds it's value and doesn't have price volatility.
Stablecoins can be used for many different use cases, such as lending, borrowing, trading, and liquidity. Stablecoins such as USDT, DAI, and others are often used in smart contracts on the Ethereum platform which is the network used for decentralized finance (DeFi). With DeFi, stablecoins are used as a way yield farmers to help them manage risk.
Stablecoins have become much more widely accepted, and are even used by merchants who accept coins like Tether because it doesn't have the price volatility that coins like Bitcoin have. Because of this, they are able to sell products for a consistent price and not take on the risk of the price changing drastically day-to-day.
It's not all peaches and cream with stablecoins. As we know, this is all new technology moving in a very fast paced world. Due to this, there is added risks of using stablecoins as well.
For example, stablecoins like USDT are less decentralized their pure cryptocurrencies like Bitcoin and Ethereum. Due to a higher centralization factor, they carry more risk of targeted government regulations or lawsuits. Stablecoins such as Tether can also blacklist transactions at the request of law enforcement. They don't have the same censorship-resistant attributes that Bitcoin has.
In addition, without audits, stablecoins like Tether have gone through a lot of scrutiny, where they have been accused of not having the full 1:1 backing of dollars to tethers, and are running a fractional reserve.
Stablecoins are still relatively new, and although some might not be perfect, the demand for them is here. In the future we may get more algorithmically created stablecoins that are more decentralized, not subject to third-parties, and so on. With more projects using automated smart contracts, it's possible that moving foward we can have even more robust and secure stablecoins with less of the risk.