Everything you need to know about stablecoins
Explained by a blockchain expert
Why stablecoins matter
Originally, stablecoins were primarily used to buy other cryptocurrencies, like bitcoin, because many cryptocurrency exchangesdidn’t have access to traditional banking. They are more useful than country-issued currencies because you can use them 24 hours a day, seven days a week, anywhere in the world – without relying on banks. Money transfers take seconds to complete.
Another useful feature of stablecoins is that they can work withso-called smart contractson blockchains, which, unlike conventional contracts, require no legal authority to be executed. The code in the software automatically dictates the terms of the agreement and how and when money will be transferred. This makes stablecoins programmable in ways that dollars can’t be.
Smart contracts have given rise to the use of stablecoins not only in seamless trading but also lending, payments, insurance, prediction markets anddecentralized autonomous organizations– businesses that operate with limited human intervention.
Collectively, these software-based financial services are known as decentralized finance, or DeFi.
Proponents hold that moving money via stablecoins isfaster, cheaper and easierto integrate into software compared with fiat currency.
Others say the lack of regulation creates big risks for the financial systems. In a recent paper, economists Gary B. Gorton and Jeffery Zhangdraw an analogyto the middle of the 19th century era when banks issued their own private currencies. They say stablecoins could lead to the same problems observed in that era, when there were frequent runs because people couldn’t agree on the value of privately issued currencies.
Worried that stablecoins could pose risks to the financial system,regulators have also taken greater interestin them recently.
The Conversation U.S. publishes short, accessible explanations of newsworthy subjects by academics in their areas of expertise.
This article byStephen McKeon, Associate Professor of Finance,University of Oregon, is republished fromThe Conversationunder a Creative Commons license. Read theoriginal article.
Story byThe Conversation
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