What is a Stablecoin?
A stablecoin is a digital asset whose price is less volatile compared to other Web3 assets because it mirrors the 3 properties of money. Most stablecoins are designed to be equal to the value of an underlining asset for which it is pegged. At one time the US dollar was pegged to gold, meaning the USD mimed physical gold.
A. An algorithm (math)
B. A commodity (gold)
C. Other assets (bonds)
D. Other cryptos (wrapped)
E. or a mix of the above (baskets)
The reasons a particular project would choose one variant over another & how they go about holding their peg pends largely on the projects overall goals for the market(s) they are trying to address. You can find this information in the project’s whitepaper, on social media, & in the reporting they do for either their community or regulators.
What is a stablecoin good for?
- Stablecoins are used by major CeFi & DeFi lending services for high interest accounts that most users would not see in traditional markets.
- Stablecoins move fiat faster than traditional x-border & FX markets because they do not ride traditional SWIFT nostro/vostro rails that take days to clear between banks in other countries.
- Stablecoins facilitate trading in/out of cryptocurrencies. They allow traders to move in/out of positions much easier because these traders can stay in the crypto ecosystem without converting to another volatile crypto asset.
Future use cases (esp. decentralized ones) will look to peg to diversified assets (a basket portfolio), because the ability to stay censorship resistant is strongest there. Ultimately, those projects will have to serve a robust DeFi market in order to survive.