Today, cryptocurrencies are still facing the problem of volatility, which discourages many investors and entrepreneurs from using these digital assets daily. That's exactly where stablecoins come to the rescue, offering stability and reliability.

What Stablecoins Are

A stablecoin is a cryptocurrency that has a fixed value due to its peg to the price of a third-party asset, such as fiat currency, gold, or even oil. There are various pegging mechanisms, including reserves in fiat currency or other assets, as well as algorithms and smart contracts.

Their main goal is to enable users to use cryptocurrencies in daily financial transactions, reducing the problem of volatility.

What makes stablecoins so convenient to use? Due to their low volatility, they can be used for buying goods and services, paying bills, or transferring money between different countries. That's especially useful for people who live in countries with unstable economies. Since stablecoins have a fixed value, they are convenient for trading, storing capital, and protecting against market volatility.

Stablecoins are usually highly liquid, meaning they can be easily exchanged for other assets or fiat money. Not everyone is willing to accept payments, even in BTC or ETH, but stablecoins are accepted almost as readily as fiat money.

Another important reason is speed. Most stablecoins use Proof-of-Stake, Proof of Reserve, or Delegated Proof-of-Stake for fast transaction processing. Unlike Proof-of-Work, which is used in BTC, PoS, PoR, and DPoS don't require large amounts of computing power to verify transactions, allowing more transactions to be processed in a timely manner.

Stablecoin Types

Fiat Stablecoins

It's the most popular type. These coins are pegged to fiat currencies. They are usually backed by appropriate reserves in banks or other financial institutions. Examples of fiat stablecoins include Tether, USD Coin, TrueUSD, and the aging Binance USD.

Algorithmic Stablecoins

These stablecoins rely on algorithms and economic models to keep their value stable. For example, Ampleforth uses an elastic supply mechanism to keep the price at a certain level. Right now, trust in algorithmic stablecoins has been undermined by the Terra/Luna crash.

Cryptocurrency Stablecoins

Cryptocurrency stablecoins offer a peg to other cryptocurrencies. For example, the DAI stablecoin is pegged to Ethereum and uses smart contracts to keep its value stable.

Commodity Stablecoins

This type is usually tied to physical assets, like gold, oil, or real estate. An example of such a stablecoin is Digix Gold (DGX), which is pegged to grams of gold.

Stablecoin Prospects

Stablecoins have strong prerequisites for further development:

• In the future, a wide variety of values can be used to back cryptocurrency. In particular, steps are already being taken to link 1 unit of a digital coin to 1 gram of gold, silver, or other precious metal. There are going to be projects where a unit of crypto will be backed by 1 barrel of oil. In the future, it'll be possible to provide stablecoins with non-physical values, such as labor force, services, and information projects.
• Stablecoins can be introduced into the sphere of buying and selling real estate through smart contracts. This method of settlement will save both parties from paperwork and time spent on banking operations.
• Now some stablecoins are cryptocurrency alternatives to fiat money. In the future, these coins may replace traditional currencies altogether.

At the same time, remember that the popularity of stablecoins depends on traditional cryptocurrencies. If people's interest in this sphere suddenly fades, even the most promising projects will fade into history.