Stable coins make it possible for people to enjoy the benefits of cryptocurrencies without the burden of its most prominent flaw, price volatility. The biggest cryptocurrencies like bitcoin and ether often undergo price changes worth hundreds of dollars every day; reducing their utility as a payment method or a store of value. Stable coins’ values are pegged to fiat currencies or commodities like gold and silver, and they remain relatively constant over time.

 

The most valuable stable coin in the world is Tether (USDT), with a market capitalization of over $1.7 billion. Its value is backed by the US dollar, and as a result, 1 USDT will always be ~$1.

Advantages of stable coins

 

1. A stable means of payment: With stable coins, users can pay for goods and services quickly and cheaply, and transfer funds internationally without the bureaucratic restrictions of traditional payment methods. To avoid price volatility, many new crypto-based projects are also using stable coins as a means to purchase services on their platforms.
2. They simplify transactions: The complexity of cryptocurrencies has often been cited as a significant obstacle to mainstream adoption. For example, if a box of pizza is $20, the current bitcoin equivalent is 0.0031 BTC; this is quite difficult for the average person to relate to. To make things even more complicated, by this time tomorrow, the price of the pizza (in bitcoin) will no longer be 0.0031; it would have increased or decreased depending on how much bitcoin’s price changed. With stable coins, the cost of items remains constant.
3. They bridge the cryptocurrency and fiat markets: Stable coins make it easier for the traditional and cryptocurrency markets to interact. Traditional investors that want to trade crypto assets can convert their fiat currency to a stable coin before converting it to bitcoin or ether, reducing the loss of value that usually accompanies the exchange from fiat to crypto.

In cases of extreme market volatility, they may also secure their cryptos by converting it back to a stable coin.

The disadvantages

 

1. Decentralization: Many stable coins are backed by fiat currencies and traded commodities. Since these coins’ values are pegged to the value of centralized objects, the coins are also centralized. As a result, these stable coins do not enjoy a significant advantage of cryptocurrencies, decentralization. Decentralized assets do not have a central point of control, so, they cannot be shut down by the government, and more coins cannot be mined due to demand.

However, other stable coins are tethered to cryptocurrencies assets and are, therefore, completely decentralized.

1. Low investment value: Another significant advantage of cryptocurrencies is how quickly price can grow. In 2017, bitcoin’s value increased by over 1000%, giving investors multiple returns on their investment. Since the price of stable coins remains constant, it offers no investment value, and there is no upside to saving the coins.

The verdict

Despite their minimal investment value and the fact that some of them are centralized, stable coins remain very important to the cryptocurrency ecosystem. Their prices do not fluctuate constantly, they provide a simple means of payment and exchange, and they drive continued innovation in cryptocurrencies and smart contracts; all these are very important for mass adoption.

 

In the future, when the cryptocurrency market gets big enough (and has enough liquidity), it may start to become more stable, obviating the need for stable coins. Before that can happen, however, the market needs to be adopted globally, and this may not occur without stable coins.