To understand the true meaning of Stable Coins you need to read the old and infamous transaction of Bitcoin in 2010 when two pizza worth $41 were bought with 10,000 Bitcoins, similarly, Ethereum in its initial stage pass through the same unstable price history, but stable coins are those types of encrypted assets that always shows stability in its prices. Stable currency combines the decentralization of blockchain and the price of domestic legal currency, due to the price volatility of major currencies like Bitcoin and Ethereum the stable coins referred to as stable because of the stable price history.
Risk of Investment
The currencies like Bitcoin and Ethereum show great risk for investment in the previous years, and highly fluctuated over time in history, but investors always willing to invest in those currencies that are unstable for a period of time, however unstable currencies show greater risk for them from value storage to the payment system.
Basically, the job of a stable coin is to give safe heaven against the huge volatility of encrypted assets, the highly fluctuated market of digital currencies always generate fear of losing the value of the available fund, investors always seek the safe heaven when bull on vacation, whenever the market drop sharply investors would jump over stable coins when market recovers they move out their funds from stable coins.
Simple Investor Technique
Many investors choose this technique against various regulatory policies in between different countries, they first choose stable currency as a safe method to store the value of a domestic legal currency and after some time bought most popular digital assets with their chosen stable assets in other words they exchange their stable coins with popular digital currencies.
Inefficient Financial System
Stable coins solve the fundamental problem of inefficient financial activities, reduce the high intermediary costs, improve the performance of international remittances that currently execute by wire transfers then go through multiple links of the source bank, intermediate bank, and receiving bank, and finally, associated with fees that too high for a limited amount.
Stable coins also very helpful when used with clearing and settlement between two parties, and also a great tool when resisting great inflation, saves against disputed local currency fluctuations. The evolution of blockchain basically established the trust between financial institutions, users, and other consumers.
Stable coin's core values lie in two characteristics one is decentralization and the second is price stability. Like USDT which is basically a widely recognized stable coin based on the US dollar exchange rate endorsed by Tether, in case of issuance you need to deposit an equivalent amount, for example, if you want to hold 1 USDT you need to deposit 1 USD in the bank, but this deposit is linked with a high rate of unilaterally price controlling mechanism that is not beneficial for the entire cryptocurrency market
Many financial institutions involved with innovation in encrypted assets like USDC released by Goldman Sachs, USD based on Stellar released by IBM, there are other stable coins that are most popular for example DAI, Basis, Carbon, and HavvenDENG, these algorithmic stable coins never require trust mechanism and rely on its own mart contract algorithms. These coins introduce a new kind of financial model which solves the problem of endorsement issuance. For example, DAI provides a high level of mortgage consensus.
The drawback of stable coins is the lack of leverage and speculation, fail to give actual algorithmic value, due to their stability of prices stable coins are over-collateralized model and prevent maximum capital utilization, the difficulties with the stable coin is that it is very difficult to expand the consensus and not only consensus but complete consensus popularization, just used as the tool of transfer the value from one cryptocurrency to another cryptocurrency