Cryptocurrency prices are highly volatile. In November 2021, Bitcoin reached an all-time high of $69,000. Fast forward to mid-December, and its price had fallen to around $46,000. Prices continued to drop in the coming months, with the value of the flagship cryptocurrency plunging to under $20,000 by the end of 2022.

Stablecoins were created to manage these wild price swings, allowing investors to quickly enter and exit positions without losing value. A stablecoin is a type of cryptocurrency designed to hold a steady price. Its value is typically pegged to traditional assets such as fiat currencies, commodities, and other cryptocurrencies.

Fun Fact: Did you know the stablecoin craze began on July 21, 2014? BitUSD, the first stablecoin, was launched on the BitShares blockchain. Since then, over 150 more stablecoins have tried their luck in the market.

Why Stablecoins Matter

Stablecoins have rapidly become a cornerstone of the digital economy, bridging the gap between traditional finance and decentralized finance (DeFi). Their stable nature unlocks a myriad of possibilities that volatile cryptocurrencies simply cannot offer.

• On-Ramps and Off-Ramps: A few years ago, you would have to wait for hours and sometimes days before a Bitcoin purchase was reflected in your wallet. This meant missing out on positive price swings. With stablecoins, you can easily convert fiat currency into digital assets and vice versa without the immediate risk of price fluctuations. This simplifies entry and exit from the crypto market. Institutional investors and businesses can now hold value in the crypto ecosystem without exposure to the extreme volatility of unpegged cryptocurrencies.
   
• Enabling Decentralized Finance (DeFi): Would you lend your money to someone if you knew its value could drop by 50% before it is repaid? Well, stablecoins are the lifeblood of DeFi. Lending platforms (e.g., Aave, Compound), decentralized exchanges (DEXs like Uniswap), and yield farming protocols heavily rely on stablecoins to provide predictable liquidity and facilitate stable value transfers. Lenders and borrowers in DeFi need certainty about the value of assets. Stablecoins enable predictable interest rates and repayment terms, fostering trust and participation in decentralized financial markets.
   
• Banking the Unbanked: In regions with limited access to traditional banking services, stablecoins offer a digital alternative for storing value, making payments, and accessing financial products, often requiring only a smartphone and internet connection. Compare this to all the documents and the stress involved in creating an account with a traditional bank.
   
• Efficient Remittances: Migrant workers sending money home, or businesses paying international suppliers, can use stablecoins to bypass costly intermediaries and slow processing times. By pegging to major fiat currencies, stablecoins mitigate foreign exchange rate volatility for international transactions, providing more certainty for global trade.

Common Stablecoins You’ll Hear About

There are more than 150 stablecoins. But I’ll tell you for free that many of them are just ambitious projects put together by a team of developers. Here’s a list of some of the reputable stablecoins you’ll come across as you journey through the world of DeFi.

• USDT (Tether): One of the oldest and largest stablecoins. Tether is pegged to the US dollar, operates on several different blockchains, and is a cornerstone of the crypto market.
   
• USDC (USD Coin): Launched by the Centre consortium, which was co-founded by Circle and Coinbase, USD Coin is a stablecoin known for its focus on transparency and regulation.
   
• DAI: Dai is a decentralized stablecoin that runs on the Ethereum blockchain. It maintains its peg to the US dollar through a system of collateralized debt positions and is backed by a basket of other cryptocurrencies.
   
• Ethena USDe (USDE): Ethena USDe is a "synthetic dollar" built on the Ethereum blockchain. It aims to maintain its peg through a complex "cash-and-carry" strategy involving simultaneously buying an asset and selling a derivative of that asset.
   
• PayPal USD (PYUSD): Launched by the global payments platform, PayPal, PYUSD is a stablecoin pegged to the US dollar. It's backed by secure dollar deposits, US treasuries, and cash equivalents.

At the heart of every stablecoin is its "peg." This is a fixed exchange rate to a specific asset, mostly the US dollar (e.g., 1 stablecoin = 1 USD). Maintaining this peg is important, and different types of stablecoins employ distinct strategies to ensure their value remains consistent.