The Case for Stablecoins: A Much-Needed Asset Class or the Worst Crypto Idea? 🚨 This article is 6 years old...
The Case for Stablecoins: A Much-Needed Asset Class or the Worst Crypto Idea?
3 min read
Updated: Nov. 7, 2019 at 2:44 am UTC
Photo by Glen Carrie on Unsplash
The case of cryptocurrencies’ global relevance remains a moot point given its wildly volatile nature, an aspect which has spurred a billion dollar crypto-exchange market.
However, some entrepreneurs and companies are determined to bring needful price stability to the digital asset market.
Crypto-Trading Market Creating Huge Volatility
Cryptocurrencies are arguably the world’s most exciting high-risk, high-reward investment class, with billions of coins exchanging hands each day. At its peak, the crypto market was $200 billion short of the magnificent $1 trillion mark; however, it has since plunged to a $205 billion total market cap after the price frenzy was corrected in 2018.
Away from frantic Bitcoin swap trading, high-leverage investments and ETF hopefuls, a group of businesses are pivoted on creating a “stablecoin,” or a cryptocurrency that does not fluctuate in monetary value.
From an economic perspective, maintaining a stable monetary value for a decentralized, limited supply cryptocurrency is seemingly impossible; demand and supply metrics ensure prices keep increasing or decreasing, which is the case with a majority of the 1,800-plus cryptocurrencies in the world today–traded on just close to 200 exchanges.
To prevent this, stablecoin projects peg their digital tokens to a fiat currency–such as the U.S. dollar, British pound or Japanese yen–or are based on an underlying real-world asset like gold. Doing so ensures an inherent lack of volatility and increased confidence.
Stablecoins: The Bad and The Backed
Most controversial in this regard is Hong Kong-based Tether, which is partly owned by cryptocurrency exchange Bitfinex and claims to have over $2.7 billion backing its tokens. The outrageous claim has been subject to several public interest lawsuits and third-party audits, with each claim remaining undisputed to date.
Inspired by Tether’s dominance, or rather its lack of trust, prominent companies like Circle are developing native stablecoins. In fact, the crypto-finance company is set to launch a “USD Coin” in the near future.
Circle CEO Jeremy Allaire explained the token concept to BBC, stating:
“Imagine a U.S. dollar coin that you can make payments with, use on crypto networks or use in smart contracts to pay dividends, but which you can convert back to fiat currency at any time.”
The USD coin is based on the Ethereum blockchain and Circle has set up internal regulatory standards, called “Center,” to overlook the protocol. The company has also highlighted Center as an integral part of its long-term vision and aims to build it as the leading platform for other stablecoin projects.
Developing a New Financial System
Allaire added that cryptocurrencies are the “next layer of infrastructure” of the internet, enabling speed-of-light monetary transfers around the world and binding, verifiable contracts for trustless peer-to-peer businesses.
Circle is backed by big-name banks looking to enter the cryptocurrency market. For example, it raised $3 billion from Goldman Sachs and Baidu in 2017. Most recently, mining giant Bitmain led a $110 million investment round in the firm.
A comparable venture is Vancouver-based Stably, founded by Kory Hoang in 2017. The company is currently developing the “Stable USD” on the Ethereum blockchain, with Hoang calling the stablecoin market a “huge opportunity.”
He added:
“Fruit sellers on the streets in Zimbabwe could accept your digital payment via an app. Their fiat money is almost worthless, but they could receive tokens in seconds and sell them very easily for a small commission.”
However, some cryptocurrency executives remain divided over the best method of achieving price stability for digital assets.
Liquidity Equals Non-Volatility
London-based Coinfloor believes the market must attract far more money to ensure higher liquidity and large trading volumes, which subsequently leads to less volatility.
Coinfloor Director Obi Nwosu maintains that robust regulations will attract institutional money into the market, indicating stablecoins may not be needed if liquidity is adequate. However, he also notes widespread concerns about money laundering and terrorist financing must mitigate before the aforementioned is possible.
Stablecoin outfits require centralized bodies to control their supply and back their tokens, which ultimately leads to a market conflicting with the decentralized ethos of cryptocurrencies and blockchain technology, according to Nwosu.
The entrepreneur considers stablecoins as the “worse of both worlds,” referring to cryptocurrencies and blockchain technology.
Tokenize it All?
Instead, Nwosu advocates the tokenization of real-world assets such as real estate and precious metal, courtesy of smart contracts governing legality, ownership and price action.
Echoing his thoughts, Akbar Thobani of SFOX said:
“We think that tokenizing assets, such as trucks, cars, planes and real estate, will become big business.”
While the fight for solving scaling issues, price volatility and ease-of-payments prevails in the cryptocurrency space, only time will decide what direction the market takes–favoring Goldman Sachs-backed ideologies or Nakamoto’s free-market solution.
