Nick Chong · 2 days ago · 2 min read
With cryptocurrency’s inherent uncertainty, users are searching for something that could bring back much-needed stability and mitigate price fluctuations. In the search, one concept continues to gain traction: stablecoins.
These are undoubtedly tough times for cryptocurrency investors. Digital monies have always been volatile investments, and it is certainly a continuing trend. More than 40 percent of the value of Bitcoin has been wiped clean in November alone, and investors are fleeing cryptocurrencies at an alarming rate.
Some users are demanding that their digital currencies become linked to real-world or algorithmic backing—which stablecoins enable—while others decry the connection of fiat and other commodities as the centralization of cryptocurrency.
The State of Crypto
Cryptocurrency has undergone a meteoric rise in recent years. Blockchain technology enabled the creation of cryptocurrencies, which quickly became touted as the decentralized answer to global finance. The first and most popular cryptocurrency, Bitcoin, garnered the most attention—and the most speculation—from investors. Excitement reached its boiling point in late 2017 when a single Bitcoin was valued at almost $20,000.
Fast forward to the present day and Bitcoin is down significantly. As investors flee cryptocurrency in general, the total market value of Bitcoin and its rivals has fallen from more than $800 billion last January to around $130 billion at the end of November.
As cryptocurrencies underperform—or downright stall—in 2018, investors and crypto users alike are searching for something less volatile. Enter stablecoins or collateralized cryptocurrencies. These cryptocurrencies are tied to some sort of collateral. This can be fiat currency, metals, bonds—anything of agreed value can be utilized to underpin the stable coin system. These coins typically use smart contracts to keep track of balances and ensure that only holders who have gone through the Know Your Customer (KYC) process can make deposits or withdrawals.
Could This be the Answer?
There is a growing chorus of users who believe stablecoins are the answer crypto markets are craving. This is because the very virtue of stablecoins—unlike cryptocurrencies before them—provides a solution to intense buyer speculation and fluctuations inherent with digital investments.
Stables coins, proponents say, give cryptos collateral. This arguably centralizes the decentralized proposition of cryptocurrencies. But believers argue this is needed during times of extreme volatility.
Additionally, stablecoins arguably bring the focus back to the business rather than buyer speculation. If one looks at Initial Coin Offerings (ICOs), most of the time they are exercises in speculation. This was especially so during the height of the cryptocurrency buzz: In many cases, it didn’t even matter if the coin was useful, people would invest because it had crypto in the title. This could inflate the actual worth or functionality of the coin—and with stablecoins, this becomes less of a problem.
It is worth noting that stablecoins can stick to decentralized principles. One good example is from Synthetix: This coin curbs volatility by holding the bulk of their collateral tokens in escrow. There are then incentives for people to back the collateral tokens, called Synths, who then profit whenever the transaction currency, Nomin, is used. For these stakeholders, there’s no compromising on the Nakamoto founding vision of decentralization because they don’t peg their currency to any centralized fiat currency or value.
Nonetheless, there are doubters out there who say stablecoins are not everything they’re cracked up to be.
Could stablecoins Be Nothing But Hype?
The largest contingent of stable coin complainers consists of cryptocurrency purists, who argue that tying any coin to a government-backed asset goes against the intentions of the decentralized system. But, as demonstrated, there are ways around this problem and stablecoins do not necessarily need to be connected to commodities like the US Dollar.
Another, perhaps, a more difficult problem for stablecoins is legitimacy. If any firm can create and then issue a stable coin, can it be trusted? This concern surrounding stablecoins has proven correct in some cases. Tether, which claimed that each token issued was backed by one United States dollar, suddenly lost its pegging to the USD in October as the value one USDT token fell significantly under $1. According to Forbes, there had never been a strong audit to back up the claim that each token was backed by a dollar equivalent.
Time will tell how stablecoins are adopted and whether or not they solve the fluctuating evaluation of many cryptocurrencies. Perhaps one way forward to make the larger system more reliable is to include government in an active role—perhaps even issuing stablecoins themselves. This could offer a central authority, avoid the proliferation of company-issued stablecoins, and include the embedding of other services, such as the automatic linking of taxation payments into smart contracts.
“It became obvious for all market participants and liquidity providers that stablecoins are must-have assets in cryptocurrencies marketplace… so initiatives coming from Singapore, Switzerland and an actual legislation on Malta are very much on time to legitimize stablecoins in other nations.”
The truth is that stablecoins could be the bridge back to legitimacy for cryptocurrency. This method could provide a way for cryptocurrencies to become a better store of wealth or medium of exchange for goods and services. Especially with older audiences who may feel disillusioned by either the tech or sudden value depreciation, digital monies pegged to a secondary value could garner their trust.