If you know a thing or two about cryptocurrencies, you are probably already aware of one of the pressing issues in the crypto sphere – volatility. While some use this change in price to try and amass wealth as soon as possible, most crypto enthusiasts just want volatility to stabilize a bit. The solution might be around the corner!
What are ‘stablecoins’ anyway and how are they stable?
The price of Bitcoin has been a real rollercoaster turning regular investors into millionaires, as well as cutting their fortune in a day. So, how is it possible to approach this problem and solve it? It seems that so-called ‘stablecoins’ hold the answer.
Stablecoin is actually an appropriate name for this new type of cryptocurrencies as their primary purpose is to, well… be stable. In other words, stablecoins should put an end to the volatility problems that crypto owners have been facing for quite a while now.
Stablecoins are cryptocurrencies – just like Bitcoin or Litecoin – but there is something different in their design which allows them to minimize the enormous volatility levels present in the two cryptocurrencies we mentioned. It’s perfectly natural to wonder how that is possible, but it takes a bit of financial knowledge to understand the entire process.
There are things in this world that have more or less ‘stable’ prices. These ‘assets’ can be things such as precious metals, gems, and more. Their value is changing from time to time, but there are no sudden ups and downs that would make them volatile. The idea is to peg a stablecoin to assets such as those exchange-traded commodities or even to fiat currencies which are considered stable.
The major problem with stablecoins
One of the names for stablecoins is asset-backed cryptocurrencies, which means that their value is backed by stable assets. However, the problem with tangible physical assets is that there must always be a centralized body which will have a task to manage them. Therefore, by pegging stablecoins to a centralized asset, their creators basically give up on the idea of cryptocurrencies being decentralized.
Sure, this may become a problem for people who started using cryptocurrencies due to their inherent decentralization. If you are familiar with how cryptocurrencies emerged in the first place, you probably know that the ethos connected to them was all about getting rid of centralized financial systems. In other words, it was its main selling point and the thing that made cryptos so popular.
However, being an asset-backed cryptocurrency is not a catastrophe from a pragmatic point of view. Assets stabilize coins, and the financial risk related to using stablecoins is significantly lower compared to using traditional cryptocurrencies.
The solution? Blend cryptocurrencies and stablecoins
If collateral for asset-backed cryptos or stablecoins is something that makes them centralized in a way, what would be a solution to making stablecoins decentralized? One of the possible answers was to make cryptocurrencies collateral for stablecoins. In other words, all collateralization would happen on the blockchain, supported by technologies such as smart contracts, thus letting stablecoins welcome decentralization.
At this point, you are probably thinking: how is it possible to make a stable cryptocurrency which is based on unstable cryptos? Well, the stability is not only achieved by collateral, but also by using incentives and supplementary instruments.
It seems like a perfect combination if the incentive thing could really work. The problem is that these types of stablecoins are very complex and their technical implementation takes a lot of time. The complexity of code results in a number of bugs that can occur in smart contracts, making crypto-backed stablecoins somewhat unreliable.
What is the most popular stablecoin and is it a threat to traditional cryptocurrencies?
At the moment, the most discussed asset-backed cryptocurrency is Tether – not only because it is the most popular coin of this kind, but also because it is followed by a couple of controversies. This presents the main reason why many people still prefer not investing in this coin. Tether is backed by the US dollar, which means that it will always be worth $1, and will maintain $1 in reserves for every ₮ (USDT) issued.
The main controversy related to this coin is connected to its company failing to disclose a valid audit that would provide additional information on the reserves that are used to back Tether. This paved the way for price manipulations which resulted in many additional controversies.
Nevertheless, Tether remains the single most popular stablecoin with the current market cap being more than $2.8 billion and a total circulating supply of 2,823,871,814 USDT (out of 3,220,057,493).
So, where are stablecoins now?
Luckily, Tether is not the only stablecoin which is backed by US dollars. Other stable cryptocurrencies such as Gemini Dollar (GUSD) or USD Coin (USDC) are still being used, and many new similar projects are currently being worked on. Some of the popular stablecoins worth mentioning are Dai, TrueUSD, Paxos Standard, etc.
When you take a look at the list of the most popular cryptocurrencies at the moment, Tether is the only stablecoin that is included in the top 20 cryptos. While being practical and useful, stablecoins are, at the moment, very far from overtaking traditional cryptocurrencies. Despite that, everything is possible in the crypto sphere, and if people working in the industry manage to overcome certain problems related to stablecoins, we might even see a change happening in the future. At this point, it is impossible to make any kind of prediction related to stablecoins being a threat to cryptos.