What Are 'Stable Coins'?

Bitcoin, the most widely traded cryptocurrency, just marked a decade of existence. In that time, digital currencies — which are thought to hold advantages such as security, quick settlement, low transaction fees and decentralization — have not made as far of inroads as their proponents hoped.

A frequent pushback against digital currencies is their extreme volatility due to a lack of inherent value. After advancing about 1,400 percent in 2017, bitcoin is down in the dumps this year, having lost about 60 percent of its value, according to CoinMarketCap data.

The volatility is a hindrance for people using cryptocurrency for everyday transactions. That could be thing of a past with the advent of a new breed of cryptocurrency: stable coins.

A Stable Coin, Defined

A stable coin is a cryptocurrency tied to a stable assets such as the U.S. dollar or gold. The stability imparted by this class of currencies could go a long way in finding mainstream acceptance.

In short, a stable currency draws on the best features of fiat and digital currencies, combining the former's stability with the latter's security and quick processing attributes.

Popular Stable Coins

Broadly, stable coins are categorized into three types: those linked to a fiat currency or a basket of currencies, those linked to commodities and those using algorithms to control supply, or non-collateralized stable coins. 

• Tether: This well-known stable currency was first traded on cryptocurrency exchange Bitfinex in January 2015. Tether is maintained at parity with the U.S. dollar. 

Other stable coins include: 

• Tiberius Coin (TCX) is linked to seven metals: gold, platinum, tin, nickel, cobalt, aluminum and copper. 
• Paxos Standard is collateralized 1:1 to the U.S. dollar and has been approved and regulated by the New York State Department of Financial Services.
• Gemini Dollar is a U.S. dollar-backed ERC-20 stable coin, also approved and regulated by the New York State Department of Financial Services.
• CarbonUSD (CUSD) is pegged to the U.S. dollar.
• TrueUSD is collateralized 1-to-1 to the U.S. dollar.
• LBXPeg was launched by the London Block Exchange and pegged 1-to-1 to the pound.
• Candy is issued by Mongolian telecom company Mobicom and linked to the turgik, the Mongolian currency.
• Basis algorithmically adjusts supply in order to keep prices stable.

Stable coins come with their own merits and demerits. They could be used for day-to-day transactions and come in handy for overseas transactions, as the commission involved in conversion could be eliminated.

On the flipside, stable coins have less liquidity than other cryptocurrencies, as the regulations governing the fiat currency or commodity they are backed with could be applicable to the stable coin too, impacting the conversion efficiency. Stable coins also carry the risk of a crash if the underlying fiat currency or commodity experiences a steep downward spiral.

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