What Are Stablecoins and Why They Are Important

Why stablecoins are important to the future of finance

A stablecoin is a digital dollar that makes participating in the global digital economy, easy. Purists would call a stablecoin a cryptocurrency token denominated in and equal in value to a single unit of another asset. These reference assets are typically the dollar or euro but can be commodities such as gold and oil, or even Arizona Tea. The term that defines this 1:1 value relationship is a peg. For a stablecoin pegged to the US dollar, one stablecoin is worth and always redeemable for $1.

The goal of a stablecoin is to stay pegged to its reference asset. To maintain its peg, stablecoins are backed by reserves equal in value to the dollar value of stablecoins outstanding. If the circulating supply of a stablecoin is 1 billion, its reserve is equal to at least $1B. The stronger the reserve, the stronger the peg, the more adoption a stablecoin will have.

The process of producing stablecoins for the first time is known as “minting”. This is how stablecoins enter circulation. If you have $100 and send that to a stablecoin issuer, you will mint 100 stablecoins, each worth $1. If you ever want to exchange your stablecoins for dollars, you’ll be able to do so at a 1:1 value. Most consumers don’t mint though, opting instead to acquire stablecoins on exchanges.

Stablecoins in the wild

Stablecoins facilitate participation in the crypto economy. Some exchanges don’t even accept fiat currencies, therefore holding stablecoins better prepares a person for buying and trading opportunities.

The most obvious benefit of stablecoins is their stability. If both parties in a transaction can trust that 1 Stablecoin = $1, they can transact just like they would with cash or card. As permissionless currencies, these two actors can exchange stablecoins without needing any additional parties or approvals. Removing intermediaries not only increases settlement times, but nearly eliminates fees and empowers individuals.

As borderless instruments, these benefits extend to improve peer-to-peer payments too. To split a dinner bill abroad or transact internationally, Venmo and Zelle has no role, and using credit cards…