Why do people use stablecoins?
Stablecoins are often backed by assets with values that are considered to be stable, such as a local currency like the US dollar, or an asset class like gold. This is because they are chiefly used to interact with assets that are more prone to sharp price movements, such as Bitcoin.
Just like the name suggests, these tokens are considered ‘stable’ because their value is stable relative to the currency they are pegged to. So, the intention of a stablecoin is to minimise volatility. This gives buyers and sellers more certainty that the value of their stablecoin shouldn’t be subject to drastic price changes in short time periods.
Stable assets are particularly useful in countries that experience politico-economic crises, where local currency loses extreme value and inflation spirals out of control. Stablecoins are borderless and maintain value wherever you are in the world.
One of the primary functions of a stablecoin is to facilitate trades on crypto exchanges. Instead of buying cryptocurrency with fiat currency, traders will exchange fiat for a stablecoin, and then perform a trade for another cryptocurrency like Bitcoin or Ether. While beginners to trading use stablecoins to mitigate trading fees, more advanced traders will also use stablecoins for a variety of purposes, such as staking and lending.
Payments and remittances
Stablecoins are easily transferable, even across borders, and don’t require you to have a bank account in order to hold them. This means they’re especially useful for payments and remittances. By sending stablecoins from one wallet to another, users have the opportunity to bypass banks which typically charge high fees. Stablecoin’s value can also be sent to regions where US dollars are hard to obtain or where there is instability in local currency.
For a more comprehensive overview check out our beginner’s guide to stablecoins.