The Emergence of Stable Coins: An Alternative to Cryptocurrencies

Published : Feb 11, 2019

Stable Coins

  • Over the last couple of years, it's been a ride of high volatility for cryptocurrencies.

    After the rise of cryptocurrencies, several industries have felt the FOMO and rushed toward adapting their use cases instantly.

    However, despite the boom in 2017, there are numerous unresolved issues in the crypto world hampering its adoption on a global scale.

    After a slight crash in 2018, cryptocurrencies' potential has got hampered on a macro level as well.

    So, crypto enthusiasts now look up to the Stable Coin- a new innovative method of digital currency whose value gets backed up by another asset - as the alternative to the crypto world's issues.

    If this is the case, then, we need to look at which type of digital currency applications can Stable Coins enable?

    Issues with the Current Cryptocurrencies

    • High Price Volatility (A prominent factor that is both the driving and the lacking aspect of public trust in cryptos as a trustless and reliable currency alternative).
    • Improper Regulatory Frameworks (for successful guidance to their widespread adoption)
    • Considered as Speculative Investment
    • Achievements of real-world assets like fiat currency and precious tangibles that appear elusive to cryptocurrency: durability and a history of trust, to a certain extent.

    These aspects are the real and lasting value of a currency in the world. Digital currency models, across both trading and storage, must strive to achieve.

    Undoubtedly, it's a challenging proposition, but achievable.

    As per an Annual Economic Report by the BIS, an association of the world's central banks, ceaseless events of a stable currency are much more of an exception than the norm.

    In reality, history has become a graveyard of currencies due to unstable trust.

    Museums around the world specifically dedicate whole sections to such graveyards.

    For instance, the British Museum has devoted its room 68 to display shells, stones, tobacco, numerous coins and pieces of paper that are no more acceptable due to their lost acceptability as an exchange medium.

    The Emergence of the Stable Coins as the Alternative:

    The Stable Coin - a new method of cryptocurrency that get pegged to another value-based asset like a fiat currency, any other cryptocurrency or precious metal- theoretically signifies the crypto market's answer to above questions (issues).

    You can consider the Stable Coins as the reliable, low-risk crypto-coins.

    Their core strength is their ability to transfer and store efficiently rather than expanding wealth.

    Also, they are also interconnecting traditional and digital currency.

    Types of Stable Coins

    • Collateralized
    • Uncollateralized/algorithmic

    Value-based real-world assets (fiat or commodities) or other cryptocurrencies are the supporting mechanisms of Collateralized Stable Coins, while uncollateralized Stable Coins are algorithmically pegged.

    For making a coin stable, an equivalent value in the form of the US dollars or any other real-world assets is put in a bank aside. A centralized financial organization helps foster and maintain trust. It means these value-based coins should be available to be redeemable for their related assets. Also, the coins must not be created and disseminated if they don't hold true.

    The most widely accepted real-world asset-backed Stable Coin is Tether. It holds an overwhelming percentage of the total capitalization of this market.

    Except for the bitcoin, other cryptocurrencies back the crypto-collateralized coins.

    Due to less stability of cryptocurrencies than real-world assets, crypto-collateralized coins get over-collateralized.

    A U.S. dollar pegged stable coin would be pegged in US$1 for one stable-coin, whereas an ethereum backed stable-coin would get pegged in US$2 worth of Ethereum for the Stablecoin worth of US$1. It is to secure stability even with frequent fluctuations.

    Another type of these coins is uncollateralized or algorithmic Stable Coin. They are completely decentralized and stabilized using algorithms dictating their value.

    These algorithms control value and stability through maintaining the uncollateralized stablecoins' supply--decreasing and increasing it as required.

    The Current State

    Consistent and precise pegging and backing by associated assets will determine whether these coins are or can become truly 'Stable.' It's these factors that will tell whether these coins will be the latest crypto craze or the legitimizer of cryptocurrency.

    Stablecoin projects have successfully raised approx. US$350 million in investment capital. They have been successful in attracting attention from financial companies within and outside of the crypto business. Not only this but established crypto exchange platforms have also begun embracing Stable Coins.

    The Conclusion

    If stablecoins can achieve true stability, they could unlock the potential of the cryptocurrency domain and help in the widespread adoption of its application and impact.

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