A stablecoin is a type of digital currency. Its value is fixed (pegged) to another asset's value.
This means that, for every stablecoin in circulation, there is an equivalent amount of the underlying asset held in reserve, which acts as collateral. This enhances the level of stability and predictability of the stablecoin.
In simple terms, stablecoins are digital asset currencies whose values come from well-established fiat currencies issued and backed by a government, such as the US Dollar, or commodities, such as precious metals.
One of the main advantages of stablecoins is their use in a wide range of transactions. Because their value remains relatively stable, they can be used to acquire goods and services without the risk of significant price fluctuations. This allows stablecoins to be a valuable alternative to traditional currencies, as their value does not change as much over time.
Stablecoins’ allows for long-term investment, giving them a second advantage and transforming them into an attractive option for portfolio diversification and a store of value. Combining blockchain technology with the ability to track another commodity’s price or value further enhances predictability.
There are several types of stablecoins, each with unique characteristics. Some are backed by a single asset, such as the US dollar, while a basket of assets supports others. Some stablecoins are fully collateralized, meaning that the underlying assets back them on a 1:1 basis. In contrast, others are partially collateralized, meaning that a smaller amount of the same type of assets supports them.
In simple terms, the advantages of stablecoins are that they offer a superior level of stability and predictability, making them useful for transactions and as a store of value.
Low costs, global reach, and speed are all huge potential benefits that can be brought on by stablecoins, raising their attractiveness to become blockchain-based assets.