Stablecoins may be the key for the mass adoption of cryptocurrencies. Read more to find out how.
2017 was a golden period for Bitcoin. It reached its peak value of $13,860 against 1 BTC in the month of December, but not for long. Six months later it was surfing at $6,387. Another six months later, it reached $3,689. As of writing this blog, bitcoin surfs at $10,908.
The volatility associated with cryptocurrency has been one of the major issues which has hindered the adoption of cryptocurrency as the primary source of the exchange of value.
And so, the question still lingers: Can Cryptocurrencies be Big enough to Compete with Fiat Currencies?
Experts have been trying to answer this since the dawn of crypto-technology. The World Economic Forum has predicted that around 10% of the world’s GDP will be held in the form of tokenized assets by 2027. If we take 2018’s global GDP as a reference point, which amounted to 80 trillion US Dollars, then 10% of that would be 8 trillion US Dollars. If we factor inflation into that equation, as well as GDP growth in general, then the market for tokenized assets is looking to be immense by 2027, at least according to the World Economic Forum.
But, the issue of volatility may be a barrier to this.
Stablecoins aim at breaking this barrier, providing a rock-solid solution for the adoption of cryptocurrencies as a basic medium of exchange. Stablecoin gets the best of both worlds – the decentralization, security, immutability, and transparency of blockchain and the trust and stability of fiat currencies.
BitUSD was one of the first stablecoins which was introduced in the year 2014 on the BitShares platform. Separate pools of BitShares were kept as collateral for backing the stablecoin. Tether, the most popular stablecoin right now was also introduced in the year 2014. Tether is at present the seventh-largest cryptocurrency in terms of market capitalization and first in terms of stablecoin.
Stablecoins are backed by different types of assets, namely four-
- Fiat currency backed Stablecoins
- Asset-backed Stablecoins
- Cryptocurrencies backed Stablecoins
- Non-collateralized Stablecoins
Fiat currency backed Stablecoins
Fiat currency backed cryptocurrencies are the most common currencies, which exist and are popular among the community. Currencies such as USD Dollars, Euro, Yen back these cryptos. Tether, TruUSD, GeminiUSDC, and PAX are some examples of fiat currency backed cryptocurrency.
These cryptocurrencies are backed by precious metals such as Gold, Siver, Platinum which are much more stable than fiat currencies and can even appreciate in value with time. DigixGold (DGX), Tiberius Coin (TBX) and SwissRealCoin (SRC) are some of the asset-backed stablecoins.
Cryptocurrencies backed Stablecoins
Here, the cryptocurrencies are backed by other cryptocurrencies. This way, the concept of decentralization strengthens since everything is present in the blockchain. The collateralization ratio (the ratio of the distributed collateral value and the current risk or maximum risk of a collateralized receivable, expressed as a percentage) is kept higher in this case, compared to fiat-backed cryptocurrencies, to cope with the highly volatile crypto market. Traders can switch from highly volatile cryptocurrencies to stablecoins when the market seems highly unstable. Maker DAO’s DAI is the most prominent one with the current market cap of $79,838,260 USD.
As the name suggests, these stablecoins aim to maintain stability without relying on a collateral reserve. Logic is coded on Smart Contracts which manipulates the price back to the peg by changing the money supply. This process creates new coins when the price goes up and destroy coins when the price goes down. This model is known as Seignorage Shares. Sugarcane (SAGA), Havven (HAV) and Basis are some of the examples of Non-Collateralized Stablecoins.
Stablecoins – The Better Crypto?
Stablecoins would make the payment methods as simple as ABC. Our day-to-day transactions will become a piece of cake since the transfer of money will be instant and will require minimum transaction fees. Stablecoins will act as global currency which can be transacted in any country and be extremely helpful when buying commodities in a foreign country without having to exchange it when moving from one country to another, unlike fiat currencies.
Cross Border Payments which currently take up to a staggering 37% processing fee and transaction period of 3-10 days will be reduced to 2-3% transaction fee and instant transfer. A worker employed in Canada can send his salary to family in Manila in no time at a minimal fee.
The use of Smart Contracts can be taken heavily and payments in corporations can be automated. Not just this, there can be loan payments, insurance payments and international payments which can be automated thus easing international trade and services.
One of the major reasons for blockchain technology not going mainstream is its complexity and lack of knowledge among the masses. The concept of cryptocurrency will become easier for people to understand because 1 dollar can be equated to 1 unit of that stablecoin.
When we think of blockchain the first thing that comes in our mind is decentralization. But with stablecoins, there is one single organization responsible to maintain the assets against the issued stablecoins. This makes the system centralized and thus highly regularized.
With assets being maintained by lone organizations, there is a lack of transparency which can be resolved only with fair and regulated audits.
In the case of crypto-backed currencies, there is always the risk of asset crypto crashing thus auto liquidating the stablecoins. This makes the whole system volatile and unpredictable. It would meaning going back to the same problem which was meant to be resolved.
Cryptocurrencies are still in their nascent stage and this is even more true with stablecoins. But stablecoins does have the potential to disrupt governments’ monopoly in issuing currencies and creating a level playfield for fares markets. The future of cryptocurrencies is still on thin ice and only time will tell how it fairs with challenges thrown at it time and again. Stablecoins may hit the nail on the head with its ability to get the best of both worlds.