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In a 2013 paper published by David Yernack, the professor of finance at New York University stated that, for any currency to be useful to society, it should be able to function as a medium of exchange, a store of value and a unit of account. At the time, he was using these three criteria to discredit Bitcoin as a feasible currency for everyday use. And there is some merit to this.
Although popular cryptocurrencies can be used as a medium of exchange on a small scale and in certain ecosystems, it struggles as a store of value or a unit of account. The reason for this is the inherent instability of cryptocurrencies. Possible price fluctuations of 20% or more on any given day make it unsuited to comply with the latter two functions of a usable currency.
To address this price volatility, a certain subset of cryptocurrencies started to emerge, i.e. stable coins. Being defined by Brigitte Luginbühl, CEO of SwissRealCoin:
“Unlike cryptocurrencies such as Bitcoin, which are highly volatile, stable coins provide people with the pragmatic, helpful benefits of a cryptocurrency, without having to worry about distressing price changes since they are grounded in the real world.”
A stable coin is designed to have a stable price or value over a period of time, therefore, less volatile.
These coins aim to mimic the relative price stability of fiat currencies on one hand, but still keep the core values of cryptocurrencies such as decentralization and security, on the other hand.
Why do we need stable coins?
Without price stability, cryptocurrencies may struggle to achieve mass adoption, widespread circulation and, ultimately, everyday use.
While volatility is fine for speculation, it’s not great for everyday payments. Nobody wants to be exposed to that sort of risk on a…