Stablecoins, simply put, are cryptocurrencies with very little volatility and stability in prices, as they are backed by cash and cash assets, keeping their prices predictable with minimal risks. Since the chance of a cryptocurrency going from a million dollars to insignificance is a possibility in a very short span of time, stablecoins are used to cover the bridges between fiat & crypto for payments, lending, trading and alternative banking transactions.
However, currencies such as bitcoin and ethereum are highly volatile as they grow and fall in erratic patterns. This is something stablecoins eliminate. But given its nature of being backed by fiat itself, it raises the question of whether a stablecoin is indeed a cryptocurrency or a digitized version of fiat currency. Your guess here is probably the same as ours. Stablecoins fall in the grey area, drawing similarities from both the worlds.
Fiat-backed stablecoins are constrained by all of the regulations that come with fiat currency, compromising the efficiency of the conversion process and the potential efficacy of the digital asset itself. For example, Facebook’s Libra currency promised a stablecoin backed by a basket of global fiat currencies, thus broadening the coin’s appeal and utility. However, it received so much regulatory backlash that the project’s management had to drop it. To this day, the network is still struggling to get regulators to sanction its own stablecoin. Not just this, but all stablecoins require third-party regulations making it very difficult for them to join the true decentralization movement.
Stablecoins are helpful because they make it easier for users to transact in cryptocurrencies. They provide a link between volatile cryptocurrencies and real-world assets such as fiat currency. By trading stablecoins instead of US dollars, you may keep all of your transactions within crypto exchanges while avoiding the fees that many exchanges charge and maintain the anonymity of the transaction. Stablecoins are used as a bridge between cryptos that are run on different networks without the need for a user to fall back on fiat currency for conversion.
While stablecoins are great middlemen to the decentralization movement, that might not be enough for them to be accepted into the mainstream cryptocurrency family as their value is derived from fiat currency, commodities, other crypto currencies and/or algorithms. What started out as a means to reduce the volatility that cryptos carry have become a prop for decentralization. Missing out on the whole independence aspect, the point of having a cryptocurrency is lost when it is backed by fiat currency.