Cryptocurrencies are usually characterized by wild price swings and extreme volatility. But there is one cryptocurrency that is designed to be the exact opposite. They’re called stablecoins, and they play an important role in cryptocurrency markets. Unlike other cryptocurrencies, stablecoins have a stable price and are benchmarked to a fiat currency, such as the US dollar. Though stablecoins haven’t yet attracted as much mainstream attention as bitcoin or ether, they have become integral in the crypto ecosystem, offering a distinct set of uses that benefit investors, speculators, and other enthusiasts.
Stablecoins maintain a fiat currency reserve like the US dollar as collateral to issue a suitable number of crypto coins. Other forms of collateral can include precious metals like gold or silver, as well as commodities like oil. Most present-day fiat-collateralized stablecoins use dollar reserves. Such reserves are maintained by independent custodians and are regularly audited for adherence to the necessary compliance. Tether (USDT) is a popular crypto coin that is backed by dollar deposits and has a value equivalent to that of a single US dollar.
Originally, stablecoins were primarily used to buy other cryptocurrencies like bitcoin because many cryptocurrency exchanges didn’t have access to traditional banking. They are more useful than country-issued currencies because you can use them 24 hours a day, seven days a week, anywhere in the world —without relying on banks. Money transfers take seconds to complete.
Another useful feature of stablecoins is that they can work with so-called smart contracts on blockchains, which, unlike conventional contracts, require no legal authority to be executed. The code in the software automatically dictates the terms of the agreement and how and when money will be transferred. This makes stablecoins programmable in ways that dollars can’t be.
Smart contracts have given rise to the use of stablecoins not only in seamless trading but also lending, payments, insurance, prediction markets and decentralized autonomous organizations—businesses that operate with limited human intervention. Proponents hold that moving money via stablecoins is faster, cheaper, and easier to integrate into software compared with fiat currency.
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