In the fast-moving world of crypto, there is always the latest thing. Over the past 18 months, we have seen the proliferation of stablecoins: tokens that are pegged to and backed by assets, like a fiat currency, gold, or other types including those where an algorithm regulates the supply of the token based on demand. There are over 50 projects in late development or live, with many more on their way, and you may have heard of some of the most prominent of those; the likes of Tether, the Winklevoss twins’ Gemini dollar, MakerDAO, and Circle’s USD Coin.

Let’s just recap the fundamental question around Stablecoins: why are they useful? Stablecoins are a reaction to the fluctuations and volatility we see in cryptocurrencies with the benefits of cryptocurrency and blockchain. They offer investors – and users – the prospect of a safe haven when markets are volatile. I.e. if someone does not want to hold their wealth in fiat currency, and wants to stay within the crypto ecosystem, but needs more price stability, a stablecoin can be useful. They also offer a quick way to enter or exit highly volatile assets. Crucially, these tokens offer access to the crypto ecosystem built on the stability and endurance of the existing financial system.

And often, to help guarantee stability, Stablecoins really are collateralised by another asset or coin. I.e., as an investor, you might get $100 of a stablecoin in return for $200 of ether (or just $200). The idea here is to mimic full-reserve banking, where an institution holds the equivalent to what it lends, meaning you could never have a run on a bank, because those depositing their money could withdraw at any time.