If you’ve been keeping abreast of cryptosphere news, you know how the volatility of the coin market can wreak havoc on investor portfolios. It’s likely that you know that there are a number of proposed responses to that volatility. The biggest and most headline-grabbing of these responses has been the so-called stablecoin, a cryptocurrency that doesn’t suffer from the same volatility of other crypto assets.
What form would such a non-volatile crypto asset take, though? How would it even work? If you’ve been asking yourself these same questions, read on to learn more about the mechanics of stablecoins and why they just might be the savior the crypto community is looking for.
The Stabilizing Mechanism
Crypto assets are inherently unstable; it’s just the nature of the beast. Unless there’s something about a specific crypto coin or token’s infrastructure or construction, something that has been designed to provide an active stabilizing influence on its valuation, it’s going to be fairly impossible to ever rein in this natural volatility.
That’s why stablecoins are designed with a specific “stabilizing mechanism” hard-coded into the currency. This mechanism can take many different forms, but it’s usually most seen in how a stablecoin is backed by something else. This can be another asset, such as fiat currency or even another cryptocurrency. Some stablecoins aren’t backed by assets at all but by algorithms instead. Whatever the source, however, these coins gain stability by the sheer fact that they’re backed by something bigger than themselves.
There’s more than just backing when it comes to stablecoin success, though. Stabilization mechanisms also need accompanying support in the form of redeemability, collateralization, and pegging — three additional mechanics that we’ll delve into below in much greater detail. Without at least tangentially addressing these key factors, stablecoins simply won’t be all that stable.