A stable coin is any cryptocurrency pegged to a stable asset, such as gold or fiat currencies. In theory, a stablecoin will remain constant in price, as it is a representation of a known amount of an asset.
My question is: Does a stable coin have a set total coin supply? Or does it have to be able to create and destroy based on the demand?
The image in my head goes like this:
A stable coin pegged to a currency started off its business saying it would have a coin supply of $5 billion. Everything works well until one day, the crypto market goes south and everyone rush to buy the stable coin. The coin is unable to sell to everyone because the demand for the coin is too high, so some people are left out.
Please correct me my misconception
My question is: Does a stable coin have a set total coin supply? Or does it have to be able to create and destroy based on the demand?
The image in my head goes like this:
A stable coin pegged to a currency started off its business saying it would have a coin supply of $5 billion. Everything works well until one day, the crypto market goes south and everyone rush to buy the stable coin. The coin is unable to sell to everyone because the demand for the coin is too high, so some people are left out.
Please correct me my misconception
I think that your misconception stems from the fact that you think stablecoins can't be traded on the open market - they can, and they are still affected by demand and supply. There is a central distributor in the case of something like the Tether system, but they don't handle all the transactions that happens out of their site.
There are going to be people more than happy to sell their stable coin for above pegged prices, if the stable coin gets extra demand like that.
Your question about the supply varies depending on the method of pegging, whether or not there is a central entity manipulating the supply or not. And if there is no other way of entering the market in a period of high demand (i.e. buying from a central distributor for the pegged rate), other than on the free market, then prices will go up until the peg is corrected centrally or until demand lessens.