If you're unfamiliar, "stablecoins" are a type of token that you can trade on blockchains. The most common type is a "dollar-pegged stablecoin" which means that if you hold 100 of these stablecoin tokens, it's worth 100 US dollars (+/- a small amount at any given moment).
Stablecoins help you know what the value of your cryptocurrency is in a "real world" currency. You can "cash out" without actually pulling your money off of the blockchain.
There are lots of ways to design and build a stablecoin. For discussion purposes let's look at two:
- Fiat-backed stablecoins
- Algorithmic stablecoins
Fiat-backed just means there's a real world account somewhere holding real dollars (or pounds, yen, etc.). That money supports the blockchain token so that you could (in theory) trade your token for the backing fiat currency. This helps with trust, but it's difficult to pull off while maintaining decentralization.
Algorithmic stablecoins exist entirely on the blockchain. Periodically, the price of the token is checked and the supply is "rebased". This just means that if the price is too high, new tokens are created. If it's too low, tokens are destroyed. This balances supply and demand to keep the price pegged.
There's no one right way to build a stablecoin, but there's plenty of demand for them and thus lots of room for competitors. (The US government is even considering building a Central Bank Digital Currency aka government-backed stablecoin)
If you want to go deeper on algorithmic stablecoins, I talked with Joe Walker on the podcast this week about stablecoins and economics on Koinos.
P.S. The podcast is available wherever you listen to podcasts (Apple, Spotify, etc.). If you can't find it on your favorite podcast app, let me know.