The cryptocurrency space has seen a huge expansion of stablecoins in the past year. Almost 60 different projects are currently live and many more are being created. This week, the value of assets for all stablecoins surpassed $10 billion for the first time ever and what’s especially interesting about this stat is six weeks ago, the aggregate value of all stablecoins was $6 billion.
Stablecoins are cryptocurrencies designed to minimize the volatility of the price of the stablecoin, relative to some "stable" asset or basket of assets. A stablecoin can be pegged to a cryptocurrency, fiat money, or to exchange-traded commodities (such as precious metals or industrial metals). Stablecoins redeemable in currency, commodities, or fiat money are said to be backed, whereas those tied to an algorithm are referred to as seigniorage-style (not backed).
A stablecoin is a cryptocurrency that offers low volatility against the world’s major national currencies, unlocking the benefits for decentralized technology. In a nutshell, stablecoins can be defined as a cryptocurrency with a fixed price. People no more need to worry about the fluctuations in prices of the cryptocurrency daily while buying them.
Most of the stablecoin growth comes from Tether, which represents almost 90% of the total stablecoin supply and the largest Tether markets, measured by traded volume, are supported by two Asia-based exchanges, Binance and Huobi.
Tether was launched as RealCoin in July 2014 and was rebranded as Tether in November by Tether Ltd., the company that is responsible for maintaining the reserve amounts of fiat currency. Tether was specifically designed to build the necessary bridge between fiat currencies and cryptocurrencies and offer stability, transparency and minimal transaction charges to users. It is pegged against the U.S. dollar and maintains a 1-to-1 ratio with the U.S. dollar in terms of value. However, there is no guarantee provided by Tether Ltd. for any right of redemption or exchange of Tethers for real money – that is, Tethers cannot be exchanged for U.S. dollars.
At the technical level, stablecoins, in general, boasts many of the same benefits of Bitcoin and others, but they offer fewer drawbacks. Stablecoins are built on top of the same blockchain technology, allowing users the ability to conduct transparent P2P transactions without any middlemen involved. These transactions happen with low fees and in some situations, zero fees.
There are plenty of alternatives in the stablecoins space. TrueUSD has published its audit documentation confirming reserves. Paxos Standard and Gemini Dollar are both regulated in the state of New York. USD Coin is backed by reserves held in financial institutions.
Also many crypto projects are thinking of adding a stablecoin to the main token. The CEO of Cardano, Charles Hoskinson, is considering launching a decentralized stablecoin similar to DAI. Cardano stablecoin, would create more demand for the underlying asset, increasing both ADA’s price and its use-cases.
Stablecoins have adopted a variety of approaches to solve the price volatility problem. The highest profile attempt so far, and the most controversial, has been Facebook’s new, yet-to-be-released cryptocurrency project, Libra, which was supposed to be tied to a basket of short-term government securities and bank deposits in historically stable currencies such as U.S. dollars and Euros. Pushback from regulators and traditional financial institutions has induced Facebook to pull away from its original vision of a global currency that competed with monetary authorities. Although there is still a lot of uncertainty surrounding the project, it might look more like Venmo, with people sending dollars through Facebook.
A more recent development in the stablecoin space, and one that will perhaps prove to trump all its predecessors, is the concept of Central Bank Digital Currency. Both the European Central Bank and the People’s Republic of China have been exploring their own versions of a CBDC. Although the idea has its critics, the IMF has recently given cautious approval. Also Christine Lagarde, said that CBDC could be very positive for the financial world. Banks could reduce costs and mitigate fraud and money laundering. Additionally, she explained that it is possible to also integrate those unbanked that the private system does not include.
Critics of fiat-backed stablecoins point to the fact that they derive their value from centralized banking systems. Even further, that they undermine the economic principles of cryptocurrencies. From these arguments emerged crypto-backed stablecoins like DAI. The DAI token is pegged to the value of the US dollar and is backed by Ether. DAI holds its price via the Maker smart contract, which creates and destroys MKR tokens in response to fluctuations in the price of ETH.
Crypto-backed stablecoins have proven to be very popular among fans of decentralization and can be a way of earning passive income for anyone wanting to stake the underlying tokens. However, one concern is that if there is suddenly a massive drop in the markets, the coins could end up under-collateralized.
Asset-backed stablecoins are underpinned by reserves of assets other than fiat or cryptocurrencies. For example, Venezuela’s famous crypto failure Petro was linked to the price of oil. Digix is backed by and pegged to the price of gold. DGX, the token's project, it is backed by physical gold bullion, with 1 DGX equalling 1 gram of 99.99% LBMA-standard gold, which is kept in a custodial vault in Singapore. DGX token holders can redeem their gold by mail or pick it up personally in Singapore if they so choose.
Similarly, Paxos, the issuer of the Paxos Standard, also offers a gold-backed token called Paxos Gold. Asset-backed stablecoins are less used as a medium of exchange and more as a way of investing or trading in the underlying asset, without actually having to take physical custody.
The increasing adoption of stablecoins will act as an important catalyst to popularize the use of cryptocurrencies as a mainstream medium of everyday transactions, as well as for other applications. Such applications may include using them for trading of goods and services over blockchain, decentralized insurance solution, derivatives contracts, financial applications, and prediction markets. Such transactions are not possible if the transacting currency remains volatile which brings the inherent risk of one of the transacting parties losing the monetary value due to price volatility.
Stablecoins are a product of need, volatility-neutral assets are to be used in tandem with assets that are inherently volatile. The idea that we can eliminate fiat is perhaps wildly overambitious, and it doesn’t reflect the reality of the world economy. But stablecoins hold an increasingly important place in the world economy because the exchange environment wouldn’t work without these assets shielding their users from everyday volatility.
Stablecoins offer the best of both worlds: a decentralized, anonymous and global payment mechanism like a cryptocurrency, and steady valuations like a stable fiat currency. This makes them great for everyday use and as safe heaven when massive swings are happening on the markets.
Stablecoins may represent crypto's best chance of achieving mainstream success and recognition from the traditional financial systems. Mass adoption is one of the most important aspect when in the Crypto world. Without the everyday use factor, reliability and consumer dependance, there will not be a bright future for the cryptocurrencies. If adoption doesn’t grow at the same rapid pace that public interest grew in 2017, then cryptocurrencies will remain a speculative financial instrument, and before long they will be forgotten. If there is one thing that the crypto market desperately needs to survive, it’s stablecoins, and there is no doubt, stablecoins will be a key factor, in the future of Crypto.