Stablecoins: The Calm Amid Crypto Volatility
Stablecoin is a cryptocurrency with extremely low volatility that is sometimes used as a means of portfolio diversification. For example, a cryptocurrency backed by gold or a cryptocurrency tied to fiat.
What is stabelcoin?
Stablecoins are cryptocurrencies with a fixed value, usually tied to a leading fiat currency such as the U.S. dollar, a basket of fiat currencies, or an exchange-traded commodity such as precious metals. Stablecoins act as a much-needed antidote to price volatility in cryptocurrency markets. Stable currencies are backed by an underlying asset, usually the one they represent digitally, to provide the same price stability as fiat currencies.
The number of Stablecoins has increased dramatically in recent years, as has their variety. There are many crypto-assets tied to other fiat currencies, such as euros, and even other crypto-assets!
Some stablekcoin projects have digital assets tied to precious metals or other cryptocurrencies. For example, Facebook’s failed Libra (now Diem) project planned to use stabelcoins as a means of payment – backed by a basket of different national currencies.
While there are constant rumors of new regulations targeting stablecoins, they continue to be tolerated by authorities around the world due to their typically high compliance with financial regulations. Stablecoins have almost certainly served as an inspiration and textbook for central bank digital currencies (CBDCs).