Stablecoins are a hybrid between fiat currencies and cryptocurrencies. Their primary purpose is to bring stability to the highly volatile asset class of cryptocurrencies. This means that investors can have increased access to the new intermediary and that liquidity will be increased.
Stablecoins are designed to maintain parity with a stable currency. Typically, this means that one stablecoin token with be worth exactly one US Dollar.
A primary example of a stablecoin is Tether (‘USDT’). Tether is designed to maintain parity with the US dollar, the world’s reserve currency. Each tether coin is backed by one US dollar, held in an audited US bank account. Tether has endured considerable controversy due to the shady nature of its operations and its centralized governance model. The firm has been accused of serious conflicts of interests, where people on the board of directors are also involved in the governance of the auditing parties.
A more decentralized example would be MakerDao (‘DAI’). Stablecoins have a variety of mechanisms that can be used to maintain parity with other currencies. And MakerDao has a somewhat complex methodology in terms of maintaining parity. The Dai stablecoin is pegged to the US dollar. It is collateralized using the Ethereum cryptocurrency (‘ETH’).
It is worth mentioning that thus far, MakerDao is one of the best stablecoins, maintaining parity (1:1) with the US dollar during widespread market carnage. The same cannot be said of Tether and other stablecoins, which often break this relationship. It is also the only large stablecoin that is truly decentralized in nature.
There are many other stablecoins with high market capitalizations. Chief among these stablecoins include TrueUSD (‘TUSD’), Gemini Dollar (‘GUSD’), Paxos Standard (‘PAX’), and USD Coin (‘USDC’). Stasis (‘EURS’) is backed on a 1:1 basis against the Euro as opposed to the USD. However, not many exchanges currently support this Euro-pegged coin.
Stablecoins do add value, as they actually do bring stability. This is highly necessary for traders. But they do not bring any value to retail investors. Stablecoins do not have the potential coins such as Ethereum or Bitcoin. In short, their value is linked only to traders in a very niche role. They do not have wide applicability in a more general sense.
However, they do have a very important role to play. In order for cryptocurrencies such as Bitcoin, Monero, and Ethereum to gain widespread adoption, the price needs to be volatile. Consider a restaurant owner that makes $700 in profit in a single day, and that gets paid in BTC. If the price of BTC was to plummet 40% in a day, it would have serious implications. It would also make payroll and accounting impossible to do.
The volatility of BTC is largely a function of speculation, namely whales who are placing large positions. Stablecoins could help to stabilize the price of cryptocurrencies so that they become available to the wider public. If cryptocurrencies remain stable, they become more tradable. Until they do, they cannot be used as a common unit of exchange.