What are stablecoins?
Cryptocurrencies are historically highly volatile assets. But one type of digital asset – stablecoins – are designed to be the exact opposite of volatile. This class of digital currency is a mechanism for deploying dollars or other forms of sovereign currency in the virtual currency ecosystem.
The term “stable” comes from the intended set ratio of one token for one unit of currency. For example, one Tether should always be equivalent to one dollar.
Are stablecoins stable?
Different stablecoins employ unique mechanisms for their stability. Some are simple one-to-one pegs where one dollar is converted into one token. But other projects use algorithms and various forms of collateral assets to try and achieve a price equilibrium. These projects have been met with varying levels of success.
Are stablecoins popular?
The market leading stablecoins currently are Tether (USDT) and Circle’s dollar (USDC).
But every stablecoin carries some risk.
What are the risks of stablecoins?
Some investors perceive regulation and solvency as the biggest risks.
Various news articles and market commentators speculate on both of these risks for all stablecoins, and sometimes fear overtakes the market in reaction to this analysis. Various lawsuits and regulator actions have been taken against some stablecoin companies in the past. Also, some stablecoins have completely lost their peg or been voluntarily sunsetted.
Other risks must also be taken into account such as: coin theft and fraud of digital wallets by malicious persons, fraud and manipulation of speculating activities, risks of false distribution of stablecoins in their conversion with fiat coins or even facilitating arbitrage.
But stablecoins are an important tool for introducing non-volatile assets into the crypto-economy, even though some risks must be considered.