#39 Why stablecoins are stable
Cryptocurrencies can be extremely volatile by nature. One day they are worth $10, next week - $1000, and vice versa. This volatility makes it hard to use most cryptocurrencies for everyday use-cases like buying and selling things. But there is a type of coins that hold a stable value of $1, and they are called stablecoins.
Stablecoins are stable because they are attached to a currency like US dollar, a commodity like gold, or another cryptocurrency like Bitcoin or Ethereum. Take an example of USDC, one of the biggest stablecoins in the market. USDC is backed by real USD which means that for every 1 USDC coin in the market, there is $1 in the bank of their issuer. This 1:1 ratio makes sure that users can easily exchange their coins to real dollars and vice versa.
USDC holds a 1:1 ratio because it's backed by a stable US dollar. Another stablecoin, DAI, is backed by cryptocurrencies like ETH or Bitcoin. Because these coins are volatile, DAI has a higher ratio to keep things safe. That's why for every $1 worth of DAI in the market, there is $1.7 worth of ETH or Bitcoin in the issuers wallet.
By backing each stablecoin with a real currency or another crypto asset, issuers make sure that the coin always holds $1 value in the market. And because stablecoins are stable, they are perfect to use in daily transactions, online trading, or just to preserve the value of assets.
Next week, we will explore what makes stablecoins a superior form of currency compared to dollars or any other kind of fiat money. For now, share this essay.