Nowadays all investors interested in the cryptocurrency market are in search of the Holy Grail – a currency that simultaneously makes space profits and is protected from the insane fluctuations that are usual for this market.
Is stablecoin a possible reference point for the entire cryptocurrency market or another inoperative idea? Let’s have a look, whether the currency will be able to occupy a significant niche in the market or will it be consigned to oblivion and what its pros and cons are.
What is stablecoin?
A “stable coin” concept might be an answer as stablecoin is a cryptocurrency backed by real assets like gold or other precious metals, fiat currencies or real estate items. This currency would be decentralized without direct connection to a central bank.
Another benefit is low volatility of such a coin. If we consider Bitcoin and Ethereum price fluctuation we’ll see that cryptocurrency usually get highly volatile. In the end of 2017 Bitcoin cost up to $20,000 and then dropped back to $8,000. That makes most cryptocurrencies inconvenient for everyday transactions.
The main characteristics of an ideal cryptocurrency would be price stability, scalability, high transaction speed, privacy and decentralization. But stability is the key for wide implementation on the market: it’s important both for short-term usage and long-term investment.
Types of stablecoins
There are three types of stablecoins:
- Fiat-collateralized (assets-collateralized) stablecoins
- crypto-collateralized stablecoins
- non-collateralized stablecoins
Fiat collateralized stablecoins are stablecoins backed by fiat reserves such as USD, EUR, etc.
To create a fiat-collateralized stablecoin you need to collect fiat funds and back your coin on a 1:1 basis against the money. You can also use non-fiat commodities such as gold and oil, but you’ll be measuring non-fiat assets in fiat equivalent anyway.
The main problem with this type of stablecoin is that you need to provide regular audit of existing fiat funds to make sure that it’s still 1:1 proportion. This means you’ll need a third party custodian who acts as the guarantor.
Example: Tether, TrueUSD
Crypto-collateralized Stablecoins are backed by other reserves of cryptocurrencies. The proportion between a stablecoin and backing crypto asset differs from stablecoin/fiat pair. Crypto-collateralized stablecoins requires 2:1 ratio of Cryptocurrencies : Stablecoins. The reason is the fluctuation of crypto prices.
This kind of stablecoin is much more risky than fiat-collateralized coin. For example, if the currency that is backing a stablecoin crushes, this stablecoin crushes as well.
Non-collateralized stablecoins don’t have any particular asset to be backed by. They are stabilized by smart contracts which keeps expanding or contracting to keep the price stable. This is quite similar to what banks do with fiat currencies.
The problem is that market is not ready to use this type of coin widely as it’s highly unpredictable and can cause fast loss.
Example: Carbon, Basecoin
- Stability: stablecoin stand strong while other cryptocurrencies show high volume of price fluctuations. Stablecoin allows investors to stay afloat during market turbulence.
- Decentralized currency for daily purchases: due to the fact that they provide a stable price, this currency can be used for daily needs without being tied to the central bank.
- Standardization: stablecoin might become a reference point for crypto market, if they can be stable and provide a measuring scale.
- Legal access to the cryptocurrency market: stablecoin can be used in those countries that are hostile towards cryptocurrencies. For example, stablecoins are popular in India after Indian banks banned crypto transactions.
- High risk and low coverage: stablecoins are still quite a risky investment option and we’re on the stage of early adoption of this concept.
- Fiat-collateralized requires you to trust a centralized third party to hold your dollars (or euros).
- Crypto-collateralized depend on other cryptocurrencies that is a highly violative approachNon-collateralized requires continual network growth in the form of new investors who can provide capital to support a falling currency value.
TOP-7 Stablecoins on the market
Tether is 100% backed by fiat currency assets in a reserve account. The conversion rate is 1:1. Tether is the most popular stablecoin right now with $1,76 bln market cap.
BitUSD is a USD-backed stablecoin, one of the older stable currencies on the market. It is a popular option on the BitShares platform and is made available to all BitShares users. BitUSD is backed by the BitShares core currency, BTS, to which it can be converted at any time at an exchange rate set by a trustworthy price feed. The demand of the currency is linked to the popularity of the BitShares platform and BITUSD currently has a market cap of over $11mln.
True USD (TUSD)
True USD is a coin launched in January 2018, recently listed by Binance. The value of the TUSD Token is pegged against that of the US Dollar with 1:1 ratio. True USD is 100% collateralized by US Dollars that sit in legally protected escrow accounts. The project is a subject to monthly audits with regularly published account details. TUSD has a market cap of over $157mln.
Dai is a stablecoin backed by ETH and each coin is supposed to be worth $1. Stability is maintained through an autonomous system of smart contracts. To receive Dai, you send your tokens to the Maker platform to lock those tokens up. The Dai token also works with Maker’s MKR currency that appreciates in value in relation to the amount of ETH pledged in order to purchase the Dai token. Dai has a market cap of $63mln
Havven is backed with two coins: Nomins which is the stable coin and can be used for daily transactions and Havvens that is a crypto collateral. Havven has a fixed supply and Nomin (or eUSD) has the floating supply and derives its value from the Havven collateral. A fee for each transaction completed with Nomins will go back to the company. The fees are then distributed back to the Havven token holders who are rewarded for maintaining the system that backs itself. Havven has a $9mln market cap.
Basis, formerly known as Basecoin, is a non-collateralized stablecoin. It’s pegged its price to $1. When coins are trading for less than $1, coins are contracted by allowing coin holders to buy bonds. Coins used to buy bonds are destroyed. Supply decreases and price increases. They do the opposite to expand supply.
Carbon is a non-collateralized stablecoin too. But it is based on Hashgraph. Carbon maintains its price stability by an algorithmic bidding which helps in consensus and figuring out the right price of each Carbon. It also contracts and expands its supply based on the data points received through the algorithmic bidding with the help of smart contracts. It’s market cap is less than $1 mln right now.
The cryptocurrency market obviously needs a stable point of reference, a gold standard that could be relied upon with general market instability. That’s why market experts are warmly greeting stablecoins to develop and grow. However, the problem is that a stablecoin has a number of problems, both inherent in cryptocurrency and its own. So it’s obvious that stablecoin is useful right now for short term investments but for long term you need to do your own research first.