Stablecoins | USDT, USDC, BUSD and more
If there is one word that would never be used to describe cryptocurrencies as we know them today, it’s - stable. Digital coins are notorious for their volatility, so who in their right mind would call them stable?
Well, a type of altcoin called Stablecoin aims to change that notion. A stablecoin is a type of cryptocurrency with a fixed price.
However, a more accurate definition is that a stablecoin is a digital coin pegged to another relatively stable asset, like the US dollar.
Although, it has no ties to a central bank and has low volatility.
Alternative to fiat currencies
Perhaps long-time fans of cryptocurrency will be outraged by the idea of stablecoins. Crypto tokens were made to be an alternative to fiat currencies. So why introduce a cryptocurrency whose price imitates that of a fiat currency?
Experts backing stablecoins believe that cryptocurrencies will never be used as a medium of exchange in the real world if they remain too volatile. While Bitcoin was initially created to serve as digital cash, it evolved into a store of value instead since it has not yet achieved real-world adoption. But Bitcoin as a store of value is still a risky business. We all witnessed how much its value fell right after reaching its peak in 2017. This volatility would be inconvenient if treated as a tangible form of money. But with stablecoins in the picture, experts believe cryptocurrencies have a greater chance of being widely adopted. Hence, stablecoins are often referred to as the holy grail of cryptocurrencies.
Fiat-collateralized stablecoins
Examples: USDT, USDC, BUSD.
Stablecoins have many different types, and the most popular type is fiat-collateralized. This refers to a stablecoin that's supported by a real-world fiat asset. Currently, Tether is the most well-known stablecoin that's fiat-collateralized. One Tether is supposed to have a value equal to 1 US dollar, which means that for every Tether coin you have in your digital wallet, there is one dollar sitting in a vault validating that value.
Tether is more famous now because of the subpoena served to its auditors regarding its USD reserves. Monax founder and blockchain consultant Preston Byrne explains that this issue could spell the end of stablecoins because there will be people selling shares that are not even connected to the existing assets. Tether's controversy indicates one of the main issues traders have with fiat collateralization - the reliance on the central entity holding the reserves. After all, the reason why cryptocurrencies were attractive in the first place was that there was no third party involved. However, with centralization, you can still count on the price of a fiat-collateralized stablecoin not moving an inch.
Crypto-collateralized stablecoins
Examples: DAI, EOSDT.
For those who don't want to be stuck between a rock and a hard place, the option of crypto-collateralized stablecoins also exists. Instead of fiat currency, this type of stablecoin is backed by another cryptocurrency. If you don't fancy the centralized aspect of fiat-collateralized stablecoins, you can use the decentralized, crypto-supported stable token instead. One famous example of a crypto-collateralized stablecoin is MakerDAO (DAI). However, there's the volatility aspect to worry about.
Usually, these coins peg a mix of cryptocurrencies rather than a single one since doing so allows for better risk distribution. That's why they are often over-collateralized to remain "stable" if their crypto supports are affected by price fluctuations. However, users' primary frustration is that this type has many complex elements to consider. So, don't dive into it if your head's not ready!
Commodity-backed stablecoins
Examples: PAXG, DGX.
This brings us to the last, but not the least, type of stablecoin. In contrast to the previous two types discussed, commodity-backed stablecoins are pegged to interchangeable commodities for trading in the same market. These stablecoins usually get the support of precious metals, typically gold, which are viewed as a good store of value. FXCM states that traders consider gold a haven since its value doesn't depreciate during market recessions. Some traders store actual gold coins and jewelry, while others trade in futures and contracts. For a stablecoin backed by gold, one coin would represent 1 gram of gold. So yes, a gram of gold should be lying somewhere to support the stablecoin's value. Examples of these include Malaysia's HelloGold and Germany's Karatgold.
Commodity-collateralized stablecoins are not as popular as fiat-backed ones, but they provide another option for people who still want to transact with tokens supported by accurate, tangible value. Then again, there's the fact that these stablecoins are centralized. Furthermore, the audit process is a lot more expensive and time-consuming. It would help if you considered how difficult it is to move metals around.
Is there a stable future?
Haseeb Qureshi, "Stablecoins: designing a price-stable cryptocurrency."
By now, you probably think stablecoins are just another fad in the crypto sphere. But the idea does hold some genuine potential. If established correctly, stablecoins could pave the way for mass adoption. For stablecoins to blow up on a global scale, Cointelegraph highlights the need for developers to address the privacy aspect of stablecoins since blockchain ledgers are not ideal for keeping business interests and relationships safe. Some messiah would need to create a new system that can obtain the exchange rate of the coin and the pegged asset without relying on a third-party institution, which can be manipulated.
As of now, stablecoin projects are still experimental. However, if people figure out how to patch up the holes (we're looking at you, Tether), stablecoins can be a solid solution for global adoption. Imagine having a digital currency that could weather the storm and deal with any price fluctuation! This could signal the end of hyperinflation and eliminate the power of a central entity. It would also remove fraud and mismanagement, from which many economies suffer.
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