Stablecoins solve one of the key problems with many mainstream cryptocurrencies, namely, that their drastic fluctuations make it tough, if not impossible, to use them for real transactions.

“Digital currencies like Bitcoin and Ethereum are tremendously volatile, which makes pricing things in their terms very difficult,” says Anthony Citrano, founder of Acquicent, a marketplace for NFTs. Stablecoins avoid this issue by locking their prices to a known reserve currency.”

In addition, their stability allows many stablecoins to be used as a functional currency within a crypto brokerage. For example, traders might convert Bitcoin into a stablecoin such as Tether, rather than into dollars. Stablecoins are available 24/7, making them more accessible than cash obtained through the banking system, which is closed overnight and on weekends.

Stablecoins can also be used with smart contracts, which are a kind of electronic contract that is automatically executed when its terms are fulfilled. The stability of the digital currency also helps circumvent disagreements that could arise when dealing with more volatile cryptocurrencies.

Although the purpose of stablecoins is to offer traders a safe-haven, there are some problems that can arise from this type of cryptocurrency.

Although there are many benefits to stablecoin, there are a number of bottlenecks to be aware of. We explore each of them below and how the issues can be addressed.

by trusting a third-party to print money and keep a cryptocurrency stable, the dollars could be fractionally reserved instead of fully backed/ In this case, a bank run could cause the price of the coin to drop dramatically.

accounts can be embezzled, blocked, or accessed by unauthorised third parties. Centralisation risks mean the same monetary issues fiat-currencies face when a central authority has the power to print money without oversight. This can potentially lead to hyperinflation.

As most decentralised stablecoins live within smart contracts in protocols like Ethereum or Stellar, there’s a risk the algorithm which keeps the currency stable fails. Algorithms could even be manipulated by a third-party. Because “code is law”, updates to the network can have an impact on previous smart contracts a huge hassle for decentralised projects.

A stablecoin needs some way to “see” what happens in the real world, it’s supply must be “manualy” adjusted by someone. There must be some channel, which delivers information from the real world, makes decisions about “burning” some tokens or creating them. It can’t be done from inside. It needs an infrastructure which depends on some people and cannot be controlled by algorithms and fully decentralized. Will it be safe? Will they be honest? This is the weak point of stablecoins. If it fails — stablecoin fails.