Nowadays, “stablecoins” are considered to be the safer version of cryptocurrency, as they allow users to enjoy the benefits of acquiring cryptocurrencies that don’t have a high volatility risk, such as Bitcoin. For the majority of its enthusiasts, cryptocurrency remains a speculative investment. This deviates far from what Satoshi Nakamoto envisioned about ten years ago, when Bitcoin was created as an alternative and solution to today’s monetary system.
Early users adopted crypto to tap into the convenience of a decentralized currency that is transparent, cheap, secure, private, and instantaneous. However, cryptocurrency is still no match for traditional money because there is no certainty that the value of the cryptocurrencies that you hold today, will be the same when you wake up the next morning.
This led to the emergence of cryptocurrencies pegged to reserve assets, commonly known as stablecoins.

Stablecoins in the scene

 

Simply put, stablecoins are a new type of cryptocurrencies that offer low volatility risks and are backed by reserve assets that are expected to remain relatively constant over time, such as the U.S. dollar. Usually, a stablecoin and a reserve asset are pegged at a 1:1 ratio.
A popular example is the USDT, whereby one Tether exchanges for one U.S. dollar. While some of the world-leading currencies back most stablecoins, there are a few that are backed by other cryptocurrencies
The MakerDAO’s DAI, for example, is pegged on a 1:1 ratio to the U.S. dollar on the exchange rate but is backed by Ethereum reserves. This means that regardless of how much the Ether coin fluctuates on its own, the value of DAI will not affected, because it will remain at the same price as the dollar.

 

Bitcaribe’s proposal for hedged positions

 

Beyond cushioning users against volatility, stablecoins are an “in-between currency”. Most cryptocurrency exchanges offer crypto-to-crypto, as BitcaribeX, as well as fiat-to-crypto exchange and vice-versa services. Another group of exchanges offers crypto-to-crypto exchange only. It is here that stablecoins come into play by enabling crypto purchases for equivalent fiat. If, for example, an exchange is purely crypto-to-crypto, you can buy an ‘x’ amount of stablecoins for an equal value of U.S. dollars and use it to trade, buy or sell against another crypto on crypto-to-crypto exchanges.
Stablecoins are more than a “safe” digital asset. After a long day of trading, a crypto trader would be more comfortable keeping the day’s earnings at the same value that they finished trading.
With regular cryptocurrency volatility, this is not assured. With stablecoins, however, traders are able to exchange their crypto for stablecoins and expect the same value the next morning. This enables crypto users to continue trading without having to cash out to fiat and back to crypto every day. More importantly, given that people disassociate from bitcoin because it cannot be classified as a legitimate medium of exchange due to its volatility, stablecoins could help address the point of contention.
Already today, institutional investors, such as JP Morgan, are making inroads into the crypto space through stablecoins. Such moves may be the first step into a wider adoption of cryptocurrency.