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Stablecoins - as a medium of cryptocurrency exchange and maintaining price stability

Stablecoins are cryptocurrencies that provide price stability. Although Bitcoin is still the leading cryptocurrency, the price of Bitcoin is high volatility. Because of this feature, Bitcoin is cumbersome for usability and not ideal for making payments. Therefore, Bitcoin holders prefer not to use it but as a store of value (such as gold) and a speculative commodity.

In addition, there are two main reasons for the stability of fiat currency prices in reality. First, the value of fiat currency is tethered to assets and controlled by the authorities such as the central bank. Since fiat currency is tethered to related assets, such as gold used as collateral or foreign exchange reserves, its valuation may not be high volatility. 

Therefore, even if fiat currency valuation rises or falls sharply, Banks and government authorities will also join and control supply and demand to maintain price stability. Second, stable coins are like fiat currency. It closely tracks the value of the related asset or fiat currency. 

As a result, they are treated as reliable safe-haven assets amid volatile markets. By far, the most common types of stable coins are USD Tether (USDT), USD Coin (USDC), True USD (TUSD), Binance USD (BUSD), and Paxos Standard (PAX).

Source: coinmarketcap

Essential functions of stable coins:

1. Reduce transaction time and trade cryptocurrency quickly

• Most of the time, you cannot quickly trade Bitcoin to fiat currency (USD or Euro) on a cryptocurrency exchange. 

• Unless you withdraw the bitcoins first and then exchange them into fiat currency through a broker, this process may take a lot of time and transaction costs.

• The price of cryptocurrency is high volatility, so fast trading is the primary goal. Therefore, traders can use stable coins to exchange to fiat currencies quickly when you expect the price of Bitcoin to fall.

2. Reduce transaction costs and handling fees

• There are some costs for the exchange of cryptocurrency and fiat currency. However, if you trade crypto to crypto, it can usually be completed quickly on the exchange, and the transaction cost is relatively low.

3. Low volatility, maintaining price stability.

• The value of a stable coin is pegged to fiat currency, so you don't have to worry about whether it will depreciate by 10% against the US dollar tomorrow.

4. As the basic unit of measuring value

• Since it has the functions mentioned above, it can be used as a pricing unit. For example, how much one Bitcoin (BTC) is worth in US dollars? Does it mean that how much one Bitcoin (BTC) is worth in USDT dollar(stable coins)?