Cryptocurrency is increasingly becoming bigger in society as a great medium of exchange. Already, there are Bitcoin and Ethereum that give immense profits, and there are even more coins that are coming up day after day. Internet transactions have become much easier and faster. Bitcoins and other crypto coins are very popular, but their growth has been a huge roller coaster ride and their volatile price changes have been a big issue.
When Bitcoin transactional value skyrocketed, litecoin came into existence as an alternative. One of the reasons that cryptocurrencies are not yet fully accepted worldwide for everyday practical uses is price volatility. Hence, the need for coins which are stable like fiat currencies, that also provide the advantages of cryptocurrency.
What Are Stablecoins
Stablecoins are cryptocurrencies which have their value pegged against fiat currencies or at assets like gold and silver. Here, the uncertainty and extreme price fluctuations are reduced, which make them apt for everyday use.
These do not deviate from the original purposes of cryptocurrencies, such as privacy, transparency and fast transactions. At the same time, stable coins serve additional purposes like protection against inflation, fluctuation-free price and for large hedgers. They set fixed currency exchange rates, allow the capital to flow freely between borders and have a monetary policy of their own.
BitUSD became the first stablecoin that was launched on BitShares platform in 2014. DAI and USDcoin are few of the stablecoins which rose in the recent times. Stronghold stable coin, from the Stellar network, is being promoted by IBM.
Tether, which is the most stable, has seen a 10x growth in market cap and 36x rise in traded volume in one year period. The demand for stablecoins comes mostly from Hedgers and crypto traders. The above-mentioned surge of USD Tether, when compared to BTC and ETH is a result of global crypto-to-crypto (C2C) exchanges.
Stablecoin models, benefits and drawbacks
- Centralised IOU system – Benefit is that it is centralised. But users have to trust the system to honour the value of the underlying asset of the coin.
- Collateral-backed coins – Smart contracts manage the collateral, which are sold or transferred using algorithms. But, users mostly deposit other volatile cryptocurrencies as collateral, which actually defeats their purpose.
- Seignorage model – The model depends on supply and demand, functioning as a central bank with fiat currencies. Algorithms help the supply by increasing or reducing the number of coins. But, contracting the supply is difficult than creating tokens.
Can stablecoins be the solution
Stablecoins can resolve the obstacles of cryptocurrency adoption on a large scale. Crypto coins are fast, private and less expensive, but scalability has not fully seen global success. For another stablecoin to surpass Tether, it will take a long while. If a new and official stablecoin is issued, there is the question of what would happen to
This is another fact to consider- many stable coins are pegged to US dollar, which can be a deterrent to other countries. Converting them into other currencies, then cashing it seems a much more difficult task than it already is. This goes against the purpose with which it was created- to provide cheap, free and fast transactions.
We don’t yet know if stablecoins are the solution to problems like hyperinflation. But, it has to be seen if they can bring about a big breakthrough in increasing the use of crypto coins in everyday life. For now, the main focus is on investing into the companies making cryptocurrencies and blockchain technologies, but not in the coins themselves.
Disclaimer: “This article was contributed by the CEO of Blackmore Group, Phillip Nunn. Entrepreneur, financial expert, corporate evangelist, fintech and crypto trading authority, Phillip is an industry speaker and renowned thought leader on topics such as Fintech, Cryptocurrency, and Blockchain technologies. Follow his blog at https://phillipnunn.co.uk/phillips-blog/ ”