One concern that cryptosceptics could share is that cryptocurrencies such as Bitcoin are subject to significant price swings. This, they might say, makes cryptocurrency impractical as a medium of exchange.
While the dollar and other commonly used currencies also fluctuate in value, consumers are less likely to experience inflation or deflation of the dollar (or euro or other fiat currency) as quickly as a change in the value of their bitcoin. Prices can go up over time, ultimately decreasing the purchasing power of your paper money, but the changes are generally more subtle than those affecting cryptocurrency.
The crypto industry’s answer to these volatility concerns: stablecoins.
What are Stablecoins?
Investopedia defines stablecoins as “a new class of cryptocurrencies seeking to provide price stability and backed by a reserve”. Different stablecoins are backed by different types of “reserves”, including:
- Other cryptocurrencies, with the most popular coins such as Bitcoin and Ethereum serving as value tethers for lesser known stablecoins
- Fiat currency, with the dollar as an example
- Tangible assets such as gold, silver or other goods with fair value
The asset that supports a particular stablecoin can affect how the stablecoin issuer sets the price of a token. For example, supporting a stablecoin with Bitcoin obviously entails a level of risk. If the price of Bitcoin falls significantly, the price of stablecoins that are too high compared to Bitcoin may prevent the issuer of the stablecoin from exchanging users’ coins for the same value in Bitcoin.
Therefore, stablecoins associated with relatively volatile assets, such as other cryptocurrencies, must peg value conservatively and ensure that even if Bitcoin’s value falls significantly, they have a cushion to cash in on all the stablecoins in circulation.
There are also unique considerations when a stablecoin backup is a commodity, such as oil. The price of such a stablecoin accounts not only for the value of having a real asset carrier, but also for the compliance costs by the issuer of the coins: legal fees, maintenance fees, and any real costs associated with keeping the coin. operation above board. These fees can exceed those required for a dollar or euro-backed stablecoin – there are just more moving parts.
There is another class of stablecoin without an asset carrier, called the Seigniorage style or algorithmic stablecoin.
Rather than being tied to a commodity, these coins are even more fixed in terms of price and value. Their offer and price are built into code and are generally managed by smart contracts to provide real stability.
What are the benefits of Stablecoins?
The main advantage of stablecoins is a dead giveaway: they are stable. Or at least they are considered stable compared to other cryptocurrency classes.
There are two primary benefits of stablecoins:
- They have less volatility than non-stablecoin tokens
- By reducing volatility, cryptocurrency becomes a more viable medium of exchange
Consider the following scenario to illustrate the value of stablecoins.
Tell me I’d like to buy a pizza or motorbike from you. I offer to pay you the price of the cake or bike in Bitcoin or Ether, but you have some understandable concerns:
Of course, the value of the Bitcoin you offer is equal to that of the product now, but will it be in five minutes? How about five days?
It could be more, it could be considerably less. Sellers are generally unwilling to bet that they will suffer a loss on their product, especially when other customers are willing to pay for the pizza or motorcycle with a more stable asset, such as cash.
Additionally, to minimize the risk of fluctuations in value after paying with traditional cryptocurrency, a seller should rush to their digital wallet and convert the coin to dollars as soon as possible. This costs them time, effort and costs. Even then, they can still miss out on the transaction even before fees are taken into account.
With stablecoins, and especially those with an immutable reserve of assets, this price volatility becomes much less of a concern. Proponents, in turn, see stablecoins as an easier-to-use medium of exchange.
What is the current state of the use of stable coins?
There are two different categories of stablecoin, and each can be individually rated to measure their popularity and usefulness. They are:
- Centralized stablecoins, also known as collateralized stablecoins
- Decentralized stable coins
Centralized stablecoins are backed by fair value assets and their volatility can vary from currency to currency. For example, a stablecoin tied to the price of oil can be more volatile than one tied to a steady reserve of untouched gold. These coins typically involve custodians to manage supply and handle the administrative aspects of the coin ecosystem, unlike …
Decentralized stable coins. This second category of stablecoins is based on algorithms, which is why they are also called algorithmic stablecoins, in order to maintain price consistency. These coin regulation algorithms encourage users to buy or sell based on intentional economic motives, with the end goal of keeping the coin’s value within a predetermined price range. That is, to keep the currency stable.
Overall, the combined popularity of stablecoins is huge (in crypto terms) and growing. According to Bitcoin.com, market cap for all stablecoins surpassed $ 20 billion in early October.
Stablecoins may hold more promise as a model for wider adoption than other types of cryptocurrencies. With major governments including China embracing digital currencies and financial stalwarts like MasterCard that jump on board, the relative stability and economic viability of stablecoins can only shed a brighter light on the merits of this class of cryptocurrency.
How do regulators view Stablecoins?
Ask a question about regulation and (insert cryptocurrency-related topic here), and you’ll likely get a variation of the same answers:
- We’re not sure
- Historical precedent points to potential problems
- It doesn’t look good
- We can hope for the best
While doom and gloom may be a fair projection for the more sophisticated, fraud-mature crypto projects, there is really reason to hope regulators won’t drop a heavy hand on stablecoins.
Yes, there is generally a need for some level of regulation in the crypto space. Where there is a way to take advantage of others for enormous financial reward, there is a need for a system of checks and balances.
And yes, reports from powerful agencies such as the G-20 indicate that they are especially wary of stablecoins. This can rightly be seen as a precursor to future regulation.
But there are also signs that the mainstream may be more receptive to stablecoins than other crypto classes. The Office of the Comptroller of the Currency (OCC) now formally allows certain national banks to trade in funds generated by the issuance of stablecoins. The decision is limited to stablecoins backed by the US dollar (read details here), but from a regulatory point of view it is a step in the right direction.
The hope is that regulators will see stablecoins as a critical part of the emerging digitized economy, rather than a threat to centralized financial systems. be “crushed”.
Whether this hope materializes is largely up to regulators, and the specific decisions they make, as the influence of stablecoins become increasingly difficult to ignore, will be worth paying attention to.