Stablecoins: An Extensive Overview
The world bears witness as Blockchain technology dramatically tiptoes within every industry. Its potential seems infinite, and its presence is particularly felt within the payments system sector. With the dawn of cryptocurrencies as a medium of exchange, Blockchain technology targets to create a transparent, secure and decentralized system of payments. However, crypto enthusiasts all over the world are aware that the value of virtual currencies, particularly Bitcoin (BTC), rise and fall daily. This fluctuation ultimately leads to a growing amount of speculations and FUDs towards these digital currencies.
The unpredictable nature of cryptocurrencies causes negative sentiments of the public and slows down global adoption. Adaptation starts from the general public realizing the existence and the advantage of the blockchain phenomenon. Experts explain that the volatility of the cryptocurrency market will decrease gradually with global adaptation.
As the global awareness of the cryptocurrency increases, the cryptocurrency market has expanded exponentially over the years. The stablecoins appeared in the cryptocurrency industry to aid the gap between the industry and the conventional financial system.
How does the industry define stablecoins?
Cryptocurrencies are fundamentally different from conventional fiat currencies. Most of them are decentralized and uses advanced technologies to enable complex algorism to add efficient and fair features to our lives. However, we are still in the infant stage of global adaptation. The current crypto market represents to primarily created to provide a more practical and more convenient way for purchasing products and services. However, the sudden fluctuations that happen from time to time lead investors to doubt the conversion rates. To further promote the already nascent market, crypto advocates decided to create a type of cryptocurrency in which another asset supports the value.
Stablecoins can be pegged to cryptocurrencies, fiat currencies, and precious metals. The value can be correlated to one of the given assets; however, there are existing coins whose values are pegged to these three options. Currently, most stablecoins in the market are backed by fiat currencies, particularly to the US dollar.
The prices of cryptocurrencies, specifically Bitcoin, had shown their volatile nature many times in the past. To address this escalating issue, stablecoins to come with collaterals. Simply put, if 1,000,000 USD-pegged stablecoins are circulating in the market, then somewhere in a bank sits at least $1, 000,000.
According to analysts, the demand for such coins continues to increase. Most crypto investors are taking advantage of the digital assets that present lesser risks. Today, some of the most famous stablecoins are USDT (Tether), USD (Circle), TUSD (trueUSD), GUSD (Gemini Dollar) and USDC (Coinbase). four of the world’s most significant stablecoins managed to rake in $5 billion in just three months through their on-chain trading transactions.
How do stablecoins work?
From the name itself, stablecoins are specifically designed to carry consistent value or price, regardless of what happens in the market. There are three ways to deliver a medium between offering fiat currencies’ stability and the benefits that cryptocurrencies provide. Let’s put it this way. If you’re going to take out a loan and present crypto assets as collateral, then you’re taking a big risk as the value of these assets are subject to fluctuations from time to time. The same thing goes when you get your salary in forms of cryptocurrencies. You can’t be so sure of how much you would get as the prices can suddenly tumble.
As mentioned above, different assets back these stablecoins. First, let’s talk about fiat-backed stablecoins. Whenever a single stablecoin goes out of circulation, $1 is safely stored in an institution that acts as a central custodian. In some cases, commodities serve as cryptocurrencies’ collateral. Take Petro, for example. The national digital currency of Venezuela is backed by the country’s assets such as gold, diamonds, and oil.
Next, let’s discuss crypto-backed stablecoins. You might find this confusing as the value of cryptocurrencies are extremely volatile. While it’s true to some extent, providers have found a way to clear doubts by doubling the collateral. For a single stablecoin valued at $1, $2 would be stored on the bank. This system of over collateralization absorbs the impact of sudden price fluctuations.
The third type is noncollateralized stablecoins. The system operates with the help of smart contracts, and the process is almost the same as a reserve bank. Providers watch the market’s demand and supply. When the prices are low, they would purchase coins in circulation and wait for the price surge before issuing the coins back to the market.
However, despite having different options, you must remember that stability is not a natural feature of stablecoins; instead, it’s the ultimate goal of such tokens.
How did stablecoins gain popularity in the crypto industry?
Despite efforts in planning and establishing economic roadmaps, most nations still struggle in achieving their goals using their sovereign currencies. As a result, many countries, such as Venezuela, have decided to create a national digital currency to battle economic depreciation.
Whenever the crypto space is shrinking because of inevitable volatility, investors turn to stablecoins to keep their assets safe and secured. The thing is, it is easy to convert cryptocurrencies into stablecoins, which ultimately eliminates the option to switch to a fiat currency. Moreover, compared to crypto to fiat conversion, crypto to stablecoin incurs lesser fees because banks and processing service providers are already out of the picture.
According to CoinMarketCap, Tether managed to nip at Bitcoin’s heels in early April. The figures revealed that the former acquired $9.4 billion in trading volumes. The latter, on the other hand, had $10.2 billion.
Another factor that propelled the popularity of stablecoins are the roles taken by crypto exchanges. Aside from launching their respective versions of stablecoins, they also list existing tokens in their platforms and further promote awareness. Binance, the largest crypto exchange in the world, recently announced that it is extending its trading support to multiple stablecoins.
Are stablecoins clear of controversy?
While there is an undeniable growth and popularity in the market, stablecoins are not controversy-proof. Take Tether, for example. In 2017, an academic claimed that the stablecoin had something to do with the prices of cryptocurrencies, even noting that Tether manipulated half of BTC’s price in December of 2017.
Another concern was the sufficiency of Tether’s reserves. Are there enough dollars to back the stablecoins in circulation? In a June 2018 audit, however, it appeared that there are enough reserves. In March 2019, another controversy arose when Tether tried to thin claims about its token being supported by US dollars.
To further give the users peace of mind, CEO of Circle Jeremy Allaire reached out to many companies and suggested the implementation of an open standard. He noted that it could boost not only tokenization but also create a more stable ecosystem. Notably, Circle had introduced its stablecoin USDC in 2018.
However, critics claim that stablecoins pose significant threats to other existing cryptocurrencies. While they are being presented as a form of capital flights when the crypto industry is in chaos, the fact they are collagenized are considered by some as a weak link.
Where can you get stablecoins?
With stablecoins’ booming popularity, even banks and social networks are joining the game. Despite the negative remark of the CEO of JPMorgan Chase regarding Bitcoin, the US bank previously announced that it would develop a stablecoin to shorten settlement times on international transactions.
While others took this announcement as a massive endorsement of the potential of stablecoins, other commentators snapped and claimed that JPM’s forthcoming coin lacks interoperability. Ripple’s CEO even believes that it would fail to gain traction. However, Anthony Pompliano of Morgan Creek Digital Capital made a more controversial remark. In his podcast, he voiced out that people should hindrance JPMorgan Chase’s plans. He even emphasized that trusting the company is the same as believing a financial institution that has been found guilty of a felony.
Of course, this article wouldn’t be complete without mentioning Facebook’s impending stablecoin. According to reports, the fiat-backed stablecoin would allow unbanked individuals across the globe to send and receive payments, local and international transaction alike. However, Facebook’s Libra currently faces a significant amount of pressure from US and global lawmakers. However, if the project would see its much anticipated 2020 launch, analysts believe that the Libra stablecoin would be able to pull off $19 billion in profits in just a year.
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