Volatility is part of the crypto market. There is no secure investment in cryptocurrencies.
However, stablecoins surged to combat the same problem.
A stablecoin is a sub-category of the crypto market that helps to maintain a constant value.
Last week, primary coins such as Bitcoin and Ethereum lost a considerable amount of value.
Stablecoins were supposed to save those coins. However, everything turned south.
How do stablecoins work?
Stablecoins are cryptocurrencies designed to ease the volatility of digital assets.
Stablecoins “attempt to maintain a constant exchange rate with fiat currencies, for example through a 1:1 U.S. dollar peg,” Reuters reported.
According to CoinMarketCap data, the cryptocurrency market is worth $1.2 trillion.
Stablecoins compose $170 billion of the crypto market.
It is a small portion. However, they have a specific task.
According to the US Federal Reserve, stablecoins “are increasingly used to facilitate leveraged trading in other cryptocurrencies.”
Since 2018, they are used in international trades to avoid capital control.
“Major stablecoins such as Tether, USD Coin, and Binance USD are reserve-backed: they say that they hold enough dollar-denominated assets to maintain an exchange rate of 1:1.”
Companies use a stablecoin to exchange them for one dollar.
Did stablecoins help combat the crypto crash?
Several stablecoins work as reserve backers.
The fourth-largest of them, Terra USD, crashed from $1 to 30 cents last week.
Meanwhile, Tether also broke from the dollar peg to as low as 95 cents last Thursday.
Stablecoins had a purpose. However, they failed when nobody thought they would.
Experts say stablecoins should have stayed strong during the collapse, bringing the asset class under renewed attention.