Their value is linked to stable assets, such as traditional currencies (euros or dollars, also known as fiat currencies) or commodities such as gold. This makes them an important part of Decentralized Finance (DeFi).

What are stablecoins?

Stablecoins are distinguished by their ability to withstand fluctuations in the market. Fiat-linked stablecoins, for example, are backed by reserves of traditional currencies, such as the dollar. These reserves ensure that each stablecoin issued is actually backed by physical assets, often managed by large institutional parties. Some stablecoin issuers offer additional transparency through independent audits or real-time reporting on their reserves.

In addition, there are crypto-linked stablecoins. These use other cryptocurrencies as collateral, such as Bitcoin or Ether. To ensure sufficient stability, they usually hold more collateral than the value of the stablecoins issued. However, the success of these stablecoins depends heavily on the volatility of the underlying assets. Large market fluctuations can put pressure on stability.

Another category is algorithmic stablecoin. Instead of physical assets, these rely on sophisticated algorithms to keep the value stable. This system adjusts the supply of the coin based on supply and demand. While this model is innovative, failures such as the Terra/Luna ecosystem have shown that the risks can be significant.

There are also hybrid stablecoins that combine features of multiple categories. For example, some stablecoins are supported partly by crypto assets and partly by traditional reserves. This hybrid model attempts to leverage the best of both worlds, but also presents unique challenges, such as balancing different types of collateral.

Why are stablecoins important?

Stablecoins offer security in a market known for its high volatility. They are widely used for cross-border transactions and are crucial to the operation of DeFi platforms. Thanks to their stability, they act as a secure base for traders and investors who want to avoid the risks of traditional cryptocurrencies. Moreover, stablecoins are increasingly being used as a means of payment in emerging markets where the local currency is unstable.

What risks do stablecoins pose?

Although stablecoins promise stability, there are concerns. For example, the reliability of fiat-linked stablecoins depends on how well the reserves are managed and audited. Government intervention is also a potential risk. Regulators worldwide are exploring how stablecoins can be regulated, particularly as they compete with traditional financial systems. For algorithmic and crypto-linked stablecoins, technological complexity also plays a role; bugs or exploits (vulnerabilities that can be exploited by hackers) can compromise stability.

In the end

Stablecoins combine innovation with reliability and have proven to play an essential role in the development of the crypto-economy. At the same time, they require a critical look at the associated risks. With the right controls, transparency and terms of use, stablecoins can provide a safe and efficient bridge between the traditional and digital financial worlds. Future developments, such as central bank digital currencies (CBDCs), are likely to further influence the role of stablecoins, only underscoring their importance in the financial sector.