In the short-term, stability allows for people to transact in a practical way, and the long-term stability enables other important financial functions such as loans and credit.
For example, decentralized cross-border lending can occur through the introduction of a stable cryptocurrency. This removes the problems seen with popular high volatility cryptocurrencies that creates an uncertain lending environment as borrowers and lenders cannot comfortably plan neither for the short nor the long-term future.
Why do we need stablecoins? What are stablecoins in the first place?
Essentially, a stablecoin is a cryptocurrency that is pegged to another asset (e.g. gold, silver, the U.S. dollar, another cryptocurrency, etc.). It is a global currency which is not tied to a central bank and, as opposed to other cryptocurrencies that are often highly volatile in nature, a stablecoin should have as low volatility as possible.
The ultimate goal of a stablecoin is to become a digital form of fiat-free cash that is exceptionally stable in value.
Why we need them?
As a stablecoin has low volatility against the worlds most important national currencies, it can potentially unlock untapped benefits for a decentralized Internet.
In the short-term, stability allows for people to transact in a practical way, and the long-term stability enables other important financial functions such as loans and credit.
For example, decentralized cross-border lending can occur through the introduction of a stable cryptocurrency. This removes the problems seen with popular high volatility cryptocurrencies that creates an uncertain lending environment as borrowers and lenders cannot comfortably plan neither for the short nor the long-term future.
Different type of stablecoins
There are three main models of stablecoins:
- Fiat-collateralized
- Crypto-collateralized
- Non-collateralized (i.e. seigniorage shares)