The global cryptocurrency market has experienced myriad of changes less than three months into 2018. While these issues have led to price declines for many of the top cryptos like Ethereum and Bitcoin, prices of most Stablecoins have remained stable as advertised.
That said, Stablecoins will likely face challenging issues throughout the remainder of 2018. Here are five issues confronting the Stablecoin market for the rest of this year.
- Negative Image with Tether as the Flag-Bearer
Established in 2014, Tether (USDT) was the first Stablecoin ever on the cryptocurrency market. Despite its rapid rise up the market cap rankings and its current status as the top Stablecoin, a majority of the news surrounding Tether has been negative. Major issues for Tether include the Bitfinex hack that resulted in nearly 31 million USD of stolen USDT. Tether also completely lacked transparency regarding the collateral it had originally promised to keep in bank reserves, which led to the abrupt end of its partnership with Friedman LLP. Tether has remained in the spotlight for all of the wrong reasons.
While 2018 has been rough for Tether thus far, this negative image does not only affect this project. Unfortunately, other Stablecoin projects also face scrutiny because of Tether’s mistakes and design flaws. New and promising Stablecoin projects can offer a better market solution, but any new projects must work diligently to distance themselves from shadows Tether has created.
2. Artificial Inflation of Other Cryptos
Tether is one project that has been accused of artificially inflating the price of Bitcoin and other cryptocurrencies in late 2017. The goal of any Stablecoin project should not be to prop up the value of other cryptocurrencies that drive up rampant speculation.
This type of strategy, whether it be in fiat currency or cryptocurrency, has historically only created more problems in the long run. When investors earn about cases of intended artificial inflation, the entire market suffers. In the case of Tether artificially inflating BTC, this action could lead to more price declines throughout 2018. In turn, such practices will ultimately destabilize other cryptocurrencies as well, the antithesis of what Stablecoin projects should aim to accomplish.
3. Centralized Stablecoins
Many cryptocurrency projects and exchanges are centralized. The problem of centralization applies not only to Stablecoin but also to any type of crypto. Regarding Stablecoins specifically, many of the most popular projects remain centralized without any concrete plans to become decentralized. This is a major problem considering that many of the established top crypto projects (especially Ethereum) are actively and publicly announcing strategies to increase decentralization.
Some of the newer Stablecoin projects like USDX Protocol are committed to 100% decentralization because of the many real benefits decentralization will have for investors. For example, decentralized cryptos are far less likely to face issues like stolen funds due to hacking, an issue that many centralized cryptos currently have to face in 2018.
4. Limited by Collateral
First generation Stablecoins (i.e. Tether) rely upon collateral-backed IOUs. While the this idea was intended to give investors a greater sense of confidence that Stablecoins are backed by tangible assets, having the necessary collateral available at all times has proven very difficult for 1st generation Stablecoins to maintain.
2nd generation Stablecoins (i.e MakerDAO and Havven) tried to solve the collateral issue facing Tether by issuing Stablecoins against a distributed collateral pool that consists of assets like Bitcoin and Ethereum. However, these projects face a lot of uncertainty in 2018 as prices for the top cryptos have continued to fluctuate rapidly.
3rd generation Stablecoin projects hope to solve issues facing early generations by using algorithmic central banks that automatically expand and contract the supply of tokens. The problem is that some of the 3rd generation Stablecoin projects that promised to resolve the collateral issue have have faced other issues along the way. Basecoin has not achieved any sort of scalability, and Carbon is still heavily centralized.
5. Remaining Stable 24/7
Some Stablecoin projects have failed to maintain the stability they were designed to ensure. Having prices that should typically only vary by one cent is not something that most crypto projects have to worry about. Stablecoins, on the other hand, have to constantly be concerned with staying near the pegged value ($1.00 USD in most cases).
MakerDAO’s Dai, for instance, fell to as low as $0.72 and traded consistently at $.80 cents for a while. This project had gained a lot of hype before its launch, but things cooled down drastically after Dai took only 12 days to ‘break’. Stablecoins of 2018 must ensure that prices are stable 24/7. If a project like MakerDAO fails to deliver stability, it will have a difficult time marketing to potential investors and exchange platforms. Only those that remain completely stable are likely to survive and gain enough gain adoption to compete with Tether.
Can Stablecoins solve the issues they currently face in 2018? The answer is unclear for now. One possibility is that none of the current Stablecoin projects underway have the solution that the market really needs. However, if a Stablecoin project can address these issues, it will have the potential to create a very useful, high-adopted cryptocurrency that may indeed be the Holy Grail so many Stablecoin experts keep touting. Hopefully this will end the pervasive high volatility among cryptocurrencies.
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