The cryptocurrency world is full of volatility. Many investors have looked to Bitcoin, Ethereum, and other digital currencies as a tool to accrue wealth as prices rise amid excitement about the potential of crypto and blockchain.
Others are wary of volatility and worry large, and rapid price swings limit the potential of crypto’s real-world applicability and breadth of investors. The rise of stablecoins intends to solve both issues.
Crypto stablecoins, like Tether’s USDT, TrueUSD, and GoldCoin are a type of digital currency backed by a reserve asset. Many are pegged to the U.S. Dollar, but a growing number have precious metals or a commodity as the reserve,
The Advantages Of Control
Many stablecoin fans believe the vast majority of people will not adopt cryptocurrencies as an everyday monetary tool unless they are convinced about stability. They believe a coin should maintain its purchasing power day-to-day and exist with the lowest possible inflation.
Stablecoins are intended to solve both issues, via the reserve asset and decisions made by the coin’s authority.
The cryptocurrency world is one where decentralization is key. Many are wary of central banks and the power they exert over the global economy. Their vision of the crypto world is where people can transact with the smallest number of barriers.
Some stablecoins have attracted criticism due to their centralization, as a governing authority sometimes steps in to manage supply and demand. However, stablecoin fans argue steps to control prices are needed in order to keep the coin free from volatility and make it a useful investment as a hedge against a turbulent market.
The Types Of Crypto Stablecoins
Stablecoins can largely be classified into three types.
Fiat-collateralized stablecoins are backed by a reserve currency or a commodity like gold, silver, oil, or diamonds. Fiat-collateralized stablecoin companies maintain enough of the commodity to properly back every coin.
Legitimate projects will have audits of reserves to demonstrate to users their coins have an underlying base. Some projects will even set up livestreams so holders can rest assured the stablecoin has enough reserve assets at any time. Tether’s USDT is an example of a fiat-backed stablecoin.
The second type of stablecoins is crypto-collateralized. These coins are backed by a basket of other cryptocurrencies. Some are wary of a stablecoin backed by other virtual currencies, so many crypto-collateralized stablecoin project teams conduct more frequent audits and carry out a variety of other security measures. Crypto-collateralized coins are over-collateralized, meaning they have a larger amount of coins in reserve for a smaller number of stablecoins. This practice mitigates concerns about volatility. MakerDAO’s Dai is an example of a crypto-collateralized stablecoin (also pegged against the USD).
Non-collateralized stablecoins do not rely on a reserve. They include a working mechanism to keep a stable price, much like a traditional central bank does (through issuing more currency). These types of stablecoins often set up smart contracts to execute decisions to keep the coin at a stable price.
An example of a non-collateralized stablecoin is Basecoin, which relies on a mechanism to increase or decrease token supply as needed.
Stablecoins And Regulatory Scrutiny
Many stablecoins have enjoyed an existence outside the view of most regulators Many financial authorities have needed time to ‘catch up’ with the cryptocurrency world and understand how its dynamics fits in (or does not) with traditional finance.
Changes are on the horizon though. In summer 2020, the 200-country strong Financial Action Task Force (FATC) released a report saying stablecoins needed to adhere to standards to hinder money laundering and terrorist financing.
Speculation is that those supporting stablecoins will have to follow the same policies the FATC has laid out for other cryptos like Bitcoin.
The Future Potential Of Stablecoins
Stablecoins have been heralded as a tool to onboard everyday people into cryptocurrency. Their potential in e-commerce is cited as an example of how they could lure many to beginning using them.
Blockchain technology permits buyers and sellers to transact instantaneously and at costs much less than traditional payment merchants. Blockchain is also thought to be able to save banks $15-$20 billion per year by 2022 in infrastructure costs, resulting in faster settlement times.
Stablecoins have been seen as a viable tool for e-commerce payments due to their stability, especially for the unbanked.
Understanding Crypto Stablecoins
Stablecoins are a class of cryptocurrency that many believe help alleviate concerns about volatility. They are seen as a strong asset for investors eager to hedge against inflation or run too in times of financial uncertainty that brings assets down.