Stablecoins are the new craze in the cryptocurrency world, and for a good reason. When you purchase a stablecoin like Tether (USDT), MakerDAO (MKR), or Havven (HAV), your money is essentially converted into an asset that has relatively low volatility against fiat currencies like USD and EUR. But why is purchasing a stablecoin a wise idea? And what's the catch?
Let's say you purchase 1 ETH with USD on your favorite cryptocurrency exchange. If that price of ETH drops relative to USD, your money is worth less.
Now if Ethereum continues to drop in price, and your 1 ETH is now worth less USD, you will have to decide whether or not to keep your ETH, or cut your losses by selling it.
Stablecoins are designed to keep their price pegged to a fiat currency like the US dollar. This makes them a great onramp and offramp for quick entrances and exits in the crypto market to volatile assets like ETH and BTC.
But for every stablecoin, there's also a catch. U.S. Dollar Tether is pegged to the US dollar, but it doesn't hold an equivalent amount of USD in its treasury, and it hasn't been audited since September of 2017. And MakerDAO (MKR), though considered one of the more "legitimate" stablecoins, still carries risks that we will discuss later. The point is: everything has a tradeoff. Tread carefully.
So, if you want to purchase a stablecoin like Tether (USDT), why not just hold onto cash instead? I mean, it's essentially the same thing. Well... kind of. Stablecoins are great for merchants who may have customers who prefer cryptocurrencies over credit cards or debit cards. And for novice crypto holders who don't want to experience the same level of volatility that more experienced investors may be used to.
Some Important conisderations before purchasing a stablecoin:
Most stablecoins aren't decentralized - but they are slowly migrating that way (see: Terra (LUNA)). Tether (USDT), for example, is developed by Tether Limited, which is based in Hong Kong. Even though the company says that a dollar backs each USDT token, they aren't held in an FDIC insured bank account like you'd find with USD deposits. There have been reports of Tether Limited losing their private keys, and some people suspect that this was used as an excuse to justify printing more USDC.
Some people believe that stablecoins are a government trick to lure people into a false sense of security. After all, if the US dollar is backed by the full faith and credit of the United States, then why we would need a cryptocurrency that's pegged to the US dollar?
Most stablecoins can be used as collateral for decentralized loans. In other words, you can leverage your stablecoins to borrow money, but these loans come with interest rates.
Regarding the future of stablecoin adoption, it will largely depend on whether or not people want real-world currency represented in a decentralized fashion. But if they do, then stablecoins may replace credit cards and other payment methods in the near future.