What is a stablecoin?
A stablecoin is a digital currency that is pegged to a “stable” reserve asset like the U.S. dollar or gold. Stablecoins are designed to reduce volatility relative to unpegged cryptocurrencies like Bitcoin.
Stablecoins bridge the worlds of cryptocurrency and everyday fiat currency because their prices are pegged to a reserve asset like the U.S. dollar or gold. This dramatically reduces volatility compared to something like Bitcoin and results in a form of digital money that is better suited to everything from day-to-day commerce to making transfers between exchanges.
The combination of traditional-asset stability with digital-asset flexibility has proven to be a wildly popular idea. Billions of dollars in value have flowed into stablecoins like USD Coin (USDC) as they’ve become some of the most popular ways to store and trade value in the crypto ecosystem.
Why are stablecoins important?
The USDC stablecoin, for example, is backed by dollar-denominated assets of at least equal fair value to the USDC in circulation in segregated accounts with US regulated financial institutions. Such accounts are attested to (i.e. verified publicly) by an independent accounting firm.
Like many other stablecoins, USDC currently operates on the Ethereum blockchain. Stablecoins are free from the volatility of non-pegged cryptocurrencies, while inheriting some of their most powerful properties:
Stablecoins are open, global, and accessible to anyone on the internet, 24/7
They’re fast, cheap and secure to transmit
They’re digitally native to the Internet and programmable
What can you do with stablecoins?
Minimize volatility. The value of cryptocurrencies like Bitcoin and Ether fluctuates a lot — sometimes by the minute. An asset that’s pegged to a more stable currency can give buyers and sellers certainty that the value of their tokens won’t rise or crash unpredictably in the near future.
Trade or save assets. You don’t need a bank account to hold stablecoins, and they’re easy to transfer. Stablecoins’ value can be sent easily around the globe, including to places where the U.S. dollar may be hard to obtain or where the local currency is unstable.
Earn rewards There are easy ways to earn rewards (typically higher than what a bank would offer) on a stablecoin investment.
Transfer money cheaply. People have sent as much as a million dollars worth of USDC with transfer fees of less than a dollar.
Send internationally. Fast processing and low transaction fees make stablecoins like USDC a good choice for sending money anywhere in the world.
How do they work?
Stablecoins are cryptocurrency tokens, so they all run on a blockchain, often Ethereum. To deliver stability, they need to have either an asset backing them up that everyone agrees has value, or a promise of credit from an extremely reliable and trusted source.
For instance, the value of the USD Coin (USDC) is meant to stay as close as possible to $1. It’s backed by actual dollars stored at financial institutions. And monthly audits ensure that all those dollars are accounted for, maintaining this 1:1 relationship.
Not all stablecoins are fully backed by a fiat currency or a commodity like gold—some are even backed by other cryptocurrencies. That said, it's key to do your homework: many of these stablecoins are still widely traded.