What is a stablecoin?
An optimal cryptocurrency should have the following: price stability, scalability, privacy, and decentralization. A “stablecoin” is a cryptocurrency that is backed by a reserve which corresponds with the coins in circulation. Usually, a stable coin is pegged to U.S. dollar but is not tied to a central bank and has low volatility.
This makes the usage of a cryptocurrency as a medium of exchange more viable since the price of a stablecoin will remain the same, being the representation of a known amount of an asset.
Bitcoin and Ethereum are highly volatile, and on any given day, it is common to see an increase to 10-20% or even a decrease, making the usage of most cryptocurrencies for daily transactions inconvenient. Imagine paying $4 for your coffee today and finding out tomorrow that it should have been $3. Price changes like that are unusual for a consumer, and the adoption of stable coins seems to be a catalyst to the cryptocurrencies mass adoption.
Stablecoins are issued either by a central authority or a Decentralized Autonomous Organization (DAO). A central authority behind a stable coin is Tether which issues new coins based on the guarantee provided, allowing for more stable coins to enter in circulation if the reserve increases. The benefits of using a DAO than a centralized issuer is in that DAOs allow for additional transparency if done in a decentralized manner. Some example of DAOs stablecoins can be Dai, a stablecoin running on the Ethereum network, or NuBits, which operates partially through a DAO but is also controlled by a central authority.
Tether is the most famous and controversial stable coin which is 100% backed by FIAT currency assets in a reserve account. Tether conversion rate is one tether (USDT) equals one USD. The platform behind this stablecoin is considered to be backed entirely, and all tethers in circulation are less than or equal to all FIAT that is held in the bank account. The advantages come close to the possibility to swap from FIAT to crypto, on most of the famous crypto exchanges. The disadvantages are that Tether is centralized, and there is a lack of trust due to audit refusals and recent accusation of market manipulation.
As for today is clear that for cryptocurrencies to go mainstream, we need price stability which will give users the assurance in making daily transactions and full adoption of stablecoins will alleviate the worry of having to time your purchase with the volatility of coins like Bitcoin and Ethereum.