In 2010, two Papa John's pizzas cost 10,000 Bitcoins—about $41 at the time. Today, $41 buys just 0.0390 Bitcoin (as of August 2019), while those 10,000 Bitcoins could exceed $100 million—or far less, depending on market swings. Cryptocurrency's volatility is thrilling for traders but risky for everyday use, fueling the rise of stablecoins.
Stablecoins are cryptocurrencies engineered for price stability, typically pegged to assets like the US dollar or gold. This predictability sets them apart from Bitcoin and other altcoins, where even simple purchases like pizza could lead to massive value shifts. Yet, stability doesn't always equate to ironclad security, as mechanisms vary widely.
The most familiar are Tether (USDT) and TrueUSD, alongside Paxos Standard, Gemini Dollar, and formerly Libra. These are 'fiat-backed,' with each token backed by equivalent reserves in national currencies (USD, EUR, GBP, JPY, etc.) held in escrow. For every TrueUSD, one USD awaits redemption.
Still, risks persist: issuers could misrepresent reserves, or assets might face devaluation or loss.
Backing stability with volatile crypto like Ethereum seems counterintuitive, but over-collateralization makes it viable—as with Dai, pegged to USD on Ethereum. Users lock excess collateral to borrow Dai, which gets liquidated if values drop too far. Here's how:
This decentralized system has nuances but proves resilient in practice.
These rely purely on smart contracts to balance supply and demand, without physical backing. If priced at $1.10 due to hype, the algorithm mints more coins to restore equilibrium. If it dips to $0.90, it buys back via 'shares' promising future profits.
In essence: algorithms dynamically adjust supply for stability. Basis shut down over regulations, but projects like Carbon continue innovating.
Traders park gains overnight without fiat conversions. They're ideal for seamless crypto payments—like coffee or remittances—bypassing volatility. While crypto swings excite speculators, they complicate lending and planning. Stablecoins bridge this gap, offering USD-like reliability in blockchain's fast, borderless ecosystem.
Image credits: Scale of Justice, Supply-Demand Balance, Gold Bars
