Since the first cryptocurrency appeared a decade ago, cryptocurrencies have existed in their own space, kept separate from the traditional financial markets by a lack of regulatory approval. However, it isn’t for lack of trying. There have been numerous attempts at securing the kind of oversight and approval necessary to hit the mainstream. Stablecoins are an important step towards this kind of legitimacy.
What are Stablecoins?
Stablecoins are cryptocurrencies whose value is tied directly to external assets, usually fiat currencies or precious metals. Their supply and value can also be determined by algorithms or pegged to the value of other crypto assets.
What are the Benefits of Stablecoins?
Stablecoins aim to reduce the volatility that most investors associate with cryptocurrencies. By pegging the coin’s values to assets such as USD and gold, whose values are much less prone to wild fluctuations, stablecoins are safer for investors, and more attractive to a cautious marketplace who has seen numerous fortunes evaporate in the crypto space.
Transferring value between cryptocurrencies is generally much easier than moving between fiat and crypto markets. This is because there is only a relatively small number of crypto coins that can be directly exchanged for fiat currency. The problem facing cryptocurrency investors is that the market moves quickly, meaning that investment funds need to be kept readily accessible. But the volatility of cryptocurrency values, and the vulnerability of exchanges, makes storing funds in this form risky.
Stablecoins are beneficial to investors, the main users of cryptocurrencies, because they offer a degree of security that other cryptocurrencies don’t.
Will They Satisfy the Regulators?
At the present time, stablecoins haven’t proven to be the revolutionary force that some have hoped for. However, they undoubtedly offer a much more palatable vision for the future than traditional cryptocurrencies have. As always, there are trade-offs; backing up stablecoins with fiat currency means that banks and traditional financial institutions are part of the equation. There is some debate as to whether a crypto asset whose value is underwritten by fiat currency can ever be truly decentralized (see the examples below for more).
Stablecoins are not immune to risk. If their supply and value are determined by that of a fiat currency, they can be affected by the same market forces that cause fluctuations in Forex values. But the chances of the value of USD undergoing dramatic short-term swings is much less than it is with cryptocurrencies. Consequently, a stablecoin whose value is pegged to USD is much less volatile than a regular cryptocurrency.
Examples of Stablecoins
There are more than 50 active stablecoin projects currently in existence, with many more on the horizon. Just as with the traditional cryptocurrency market, there is a considerable amount of variety in the design of stablecoin networks. However, they all share one key feature; that the value of the coin is determined by the value of an external asset, or by an algorithm.
Tether is probably the best-known stablecoin out there right now, and by most counts is the most successful. Tether’s token (USDT) is backed up by regular USD, with Tether holding 1 USD in their bank account for every USDT in existence. This idea of not only linking the value of a stablecoin to a fiat currency but requiring physical assets be held to back it up has been adopted by a number of other stablecoins.
Tether has encountered some teething problems, throughout its life-cycle. A hack attack recently took out $30 million of their assets and also left them embarrassed regarding their claims of decentralization. There are also concerns about transparency, and whether USDT is adequately backed up by their USD holdings. However, Tether has achieved a greater market capitalization than any other stablecoin.
Like Tether, the value of USDX is tied to the USD and is determined algorithmically according to the latest market rates. Current market rates for USD are reported to USDX via their proprietary Oracle network, with the authenticity of values being verified by users on the network. Because USDX is not dependent upon a centralized authority to ensure the accuracy of reported market values, it is able to achieve greater decentralization than Tether.
Other stablecoins utilize the idea of an elastic supply, which can increase or decrease, but few have achieved the success of USDX. It has also achieved a greater level of decentralization than many other stablecoins.
One of the greatest challenges facing stablecoins is achieving an appreciable amount of decentralization. Requiring that networks hold external assets to guarantee the value of their tokens, and linking both their values, reduces their volatility, but also nudges them towards centralization. For example, a coin like Tether is dependent upon a bank to hold their fiat USD. Havven utilizes a novel approach to ensure decentralization.
There are two components to Havven, the decentralized payment network, and accompanying token. In fact, there are two tokens on the Havven network, Havven, and Nomin, with every Nomin being backed by a Havven. Token holders are compensated whenever a user transacts on the network, with users’ Havven serving as collateral in transactions.
Havven is not yet decentralized but is one of the few stablecoins that offers a clear roadmap for achieving a high degree of decentralization.
Truecoin’s TrueUSD (TUSD) is somewhat similar to Tether in that it is also backed by USD. However, the TrueCoin team have taken additional steps, including regular auditing, to improve transparency and encourage trust in the network. In addition to TrueUSD, the group behind TrueCoin also plan to release tokens in the future who are backed up by other fiat currencies and assets.
TrueCoin has also worked alongside banks to ensure they are able to maintain a transparent pool of USD to back their currency. TrueCoin themselves cannot access these holdings, instead utilizing smart contracts to manage the transfer of assets.
Stablecoins are a new development in the world of crypto, but one of the most exciting in some time. If cryptocurrencies are ever going to go mainstream, stablecoins will no doubt have a vital role to play.