Introduction to Stablecoins

Published by Mario Oettler on

The most popular stablecoins are pegged to a fiat currency. This means the price of the stablecoin in Euro or US-Dollar is always the same.

The following chart shows the price of the stablecoin Tether. You can see that the price revolves around 1 US-Dollar with very small outbursts or crashes.

For comparison, there is the price development of ETH for the same period. Here, the price surged from zero US-Dollar to 1,200 US-Dollar in 2018, fell to under 300 in 2019, and spiked in 2021 at more than 3,500 US-Dollar.

There are two reasons for using stablecoins:

  1. If you want to change ETH into fiat currency to avoid value fluctuations, you need a centralized exchange, give a bank account, id, etc. Moreover, you have to trust the exchange to be honest. Usually, it takes a while for the transaction to complete. Converting the ETH right after receiving them into a blockchain-based stablecoin means that you don’t leave the blockchain. You don’t need a centralized exchange, and you can convert the money back and forth instantly without trusting a centralized exchange.
  2. The second reason is to make on-chain payments less volatile. If you have a blockchain service that charges 0.01 ETH as a fee, in January 2019, that would have been worth one Euro. In May 2021, however, this would have been worth approximately 24.6 Euro, making the service prohibitively expensive. To avoid this issue, your smart contract could accept a stablecoin worth 1 Euro instead of ETH.