Stablecoins, as their name suggests, are cryptocurrency coins which by their design try to maintain their stability through a minimal change in the coin's market value as its price is pegged to government-regulated money or exchange-traded commodity reserve like in gold, diamonds, steel etc. This means that the value of the stablecoin is dependent on other financial forces that are not within the cryptocurrency space. There are 3 types of stablecoins which are defined by the external force that backs it.
What Are Stablecoins Used For:
The Fiat Currencies backed Stablecoin
Fiat currencies are currencies that are regulated by the government including all the paper monies that are there in the world. That is the US dollar, the Japanese yen, the English pound and so on. The stability of the traditional currencies assures its user of value and trading power, a characteristic that cryptocurrencies do not have. The correlation of the stablecoin to the fiat currencies assures the user of purchasing power as there is minimal fear of unregulated inflation and a volatile change in price.
The Commodity Backed Stablecoin
The stablecoins that are backed by commodities reserves including precious and industrial metals have an assurance of stability in their price and value as the commodities are either rare as in gold or expensive and in high demand as in the industrial metals. What this means is that the price of the stablecoin is backed by a commodity that has great value and demand.
The cryptocurrency backed Stablecoin
These are stablecoins that are backed by other cryptocurrencies. What this means is that a large reserve of cryptocurrency is held while a very small number is released in the market for use. This gives an assurance of stability as the demand of the stablecoin cryptocurrency will always outstrip the supply and therefore maintaining a good high value of the stablecoin.
How can one use stablecoins?
Stablecoins attempt to bridge unique characteristics of cryptocurrencies and those of traditional government regulated or what is known as fiat currencies as they offer a blend of the best of the 2 worlds. Having a cryptocurrency like ether which offers the security, privacy, instant real-time processing and transfer of cryptocurrencies and the stability and assurance of purchasing power of the fiat or commodity money markets makes the ether a volatile currency to use on global platforms.
Use of Stablecoins for the payment of goods and services globally.
Emerging markets and frontiers in the digital space have made it possible for online investors, users and traders to use stablecoins as the cryptocurrency for the payment of goods and services. Facebook is working on the introduction of a Whatapp stable coin with the pilot project being done in India in the near future. This will provide a seamless platform for global trading due to sheer numbers that use Facebook and Whatsapp platforms.
Countries that have weak economies face high inflation rates and devaluation of their fiat currencies will get a reprieve by the introduction of stablecoins. Venezuela which had the world's highest inflation rate of 2,000,000% in 2018 is looking into ways of implementing an automated exchange rate that has a stablecoin pegged to US dollars held in their reserve vaults. This will, in the long run, make the country's economy stronger as it will have a lower inflation rate with a strong fiat currency as well as a stable stablecoin.
Stablecoins are said to be the future of cryptocurrencies as it is stable in price due to it being pegged on tangible reserves.