What are stablecoins? Why are they important?

What are stablecoins? Why are they important? What makes them stable?

The following paragraphs were taken, with permission from the author, from the chapter about stablecoins in the Encyclopedia of Cryptography, Security and Privacy .

What are stablecoins?

In the narrowest sense, a stablecoin is a cryptocurrency that has its price pegged to a fiat currency (e.g. USD) and is fully backed by reserves denominated in the same fiat currency. More broadly, a stablecoin can be defined as a digital asset that has mechanisms to maintain a low deviation of its price from a target price.

Why are stablecoins important?

Since the invention of bitcoin and other cryptocurrencies, a major obstacle for their wider adoption and recognition as proper currencies, particularly as means of exchange and units of account, has been the instability (volatility) of their price in relation to fiat currencies. Therefore, if we are serious about creating cryptocurrencies that are really currencies, we must seek to create stablecoins in the broader sense, to overcome the obstacle of volatility.