Stablecoins are digital assets that aim to manage volatility by tracking the values of more stable assets, such as fiat currencies like the U.S. dollar. Though the name might imply otherwise, stablecoins are not without risks for investors. Here are three things to know about stablecoins.
1. Stablecoins were created to manage digital asset volatility by linking to more stable assets.
Stablecoins are designed to serve as a source of stored value within the distributed ledger technology (DLT, also known as blockchain) ecosystem, thereby reducing the need to convert digital assets into fiat currency, which typically involves both administrative burdens and significant fees. Stablecoins can also serve as a bridge between DLT markets and traditional financial systems by offering payment methods that are equivalent in both worlds, e.g., as a substitute for cash payments in transactions to buy or sell other digital assets. Several other potential use cases for stablecoins currently are being explored to facilitate payments and cash management within the traditional financial system.
Stablecoins achieve this functionality by linking their value to assets such as fiat currencies, commodities (e.g., gold), or a pool of digital assets. The applicable traditional or digital assets are then typically held in reserve to back the value of the stablecoin.