This characteristic of the crypto market means that stablecoins allow investors to dip in and out of the market, reducing their exposure to this volatility. Stablecoins also provide exchanges with liquidity, which allows the cryptocurrencies on exchanges to be converted quickly without drastically affecting the price (easier flow of money throughout the exchange).

Stablecoins also represent an opportunity for payments and transfers with very low fees between individuals and businesses. We wrote about the savings merchants can achieve with blockchain payments, as well as a piece on remittance platforms that use blockchain.

There are three broad categories of stablecoins

asset-backed off-chain: stablecoins whose price is pegged to fiat currencies like the US dollar or euro; commodities like gold; or other real-world assets. The ‘off-chain’ part of this name refers to the value being attached to collateral that exists off-chain. The biggest names in this category are all fiat-backed: USDT from Tether, with a daily trading volume that regularly exceeds $10billion, Coinbase’s USDCoin, TrueUSD from TrustToken, and GUSD from Gemini. In case you were wondering, fiat literally means ‘let it be done’, and refers to currency whose value is established by government decree, rather than direct 1:1 backing by an asset such as gold or silver. Supplies of fiat currency are determined by the central bank.

asset-backed on-chain: stablecoins that are backed by other cryptocurrencies (including other stablecoins in the case of Huobi’s HUSD).

algorithmic: a combination of smart contracts and algorithms adjust the supply of the coins in order to maintain price equilibrium. An interesting example of such a project was Basis. Launched in August 2017, Basis intended to maintain a stable price by incentivizing traders to buy and sell Basis tokens in response to changes in demand. This would be achieved through on-chain auctions of ‘bond’ and ‘share’ tokens. After raising $133million in funds, Basis was unable to overcome the obstacle of the SEC’s likely classification of these bond and share tokens as securities. This meant severe restrictions would be imposed on these auctions, weakening the stabilization method, among a host of other issues. As a result, CEO Nader Al-Naji elected to return the funds to their investors and shutter the project.

What next for stablecoins?

There is clearly a big appetite for stablecoin projects, with over 100 currently in development. With the fifth largest company in the world joining the party, it seems as though stablecoins are here to stay if they can withstand scrutiny from regulators and lawmakers. But as things go with crypto, don’t expect this road to be without bumps.

Download our full report on stablecoins via our insights page.

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