Just hours ago the cryptocurrency exchange Gemini, founded by Cameron and Tyler Winklevoss, announced the launch of the Gemini dollar, the world’s first regulated stablecoin.
How important is this? Why do we need stablecoins? What are stablecoins in the first place?
Essentially, a stablecoin is a cryptocurrency that is pegged to another asset (e.g. gold, silver, the U.S. dollar, another cryptocurrency, etc.). It is a global currency which is not tied to a central bank and, as opposed to other cryptocurrencies that are often highly volatile in nature, a stablecoin should have as low volatility as possible.
The ultimate goal of a stablecoin is to become a digital form of fiat-free cash that is exceptionally stable in value.
Why we need them
As a stablecoin has low volatility against the world’s most important national currencies, it can potentially unlock untapped benefits for a decentralized Internet.
In the short-term, stability allows for people to transact in a practical way, and the long-term stability enables other important financial functions such as loans and credit.
For example, decentralized cross-border lending can occur through the introduction of a stable cryptocurrency. This removes the problems seen with popular high volatility cryptocurrencies that creates an uncertain lending environment as borrowers and lenders cannot comfortably plan neither for the short nor the long-term future.
Different type of stablecoins
There are three main models of stablecoins:
- Non-collateralized (i.e. seigniorage shares)
Let’s briefly describe them
Fiat-collateralization is the easiest and most popular method of creating a stablecoin. Here, a centralized company holds assets in a bank account and issues tokens that represent a claim on the underlying assets. Essentially, fiat-collateralized stablecoins are backed by a real-world asset.
In this approach, similar in concept to fiat-collateralized stablecoins, crypto-collateralized stablecoins are backed by another cryptocurrency as opposed to being backed by a real-world asset.
Non-collateralized (i.e. seigniorage shares)
The final approach consists of the seigniorage shares approach. Using an algorithm, the supply of the currency expands and contracts like a central bank does with fiat currencies. These stablecoins are backed just by the expectation that they will retain a certain value over time.
Why are the Winklevoss brothers paving the path to mainstream adoption?
Let’s quickly try to spot the main difference of the just announced Gemini Dollar with, for example, the most popular stablecoin to date, Tether.
In it’s announcement, Gemini states:
“Enter the Gemini dollar — a stable value coin (often called a ‘stablecoin’) that is (i) issued by Gemini, a New York trust company, (ii) strictly pegged 1:1 to the U.S. dollar, and (iii) built on the Ethereum network according to the ERC20 standard for tokens. The Gemini dollar (ticker symbol: GUSD) combines the creditworthiness and price stability of the U.S. dollar with blockchain technology and the oversight of U.S. regulators, namely, the New York State Department of Financial Services (NYDFS).”
Spotted it? Regulation.
This past year Tether has faced a lot of critisism caused by the lack of transparency surrounding their activities. What remains to be proved is if they indeed hold 1 dollar in the bank for every Tether minted.
On the other hand Gemini has much more transparent plans.
The USD backing the tokens will not only be custodied by a U.S. bank but will also be eligible for “pass through” insurance from the Federal Deposit Insurance Corporation (FDIC).
Moreover, Gemini has enlisted an independent registered public accounting firm to publish monthly reports verifying that the tokens are fully-backed by USD and has also subjected the GUSD smart contracts to a rigorous audit by an independent security firm.
The issue of market volatility has stood in the way of the mass-adoption of cryptocurrency for a long time.
Stablecoins solve this problem by making it easier and safer to use digital coins for everyday purchases, including app payments like we use for Bitz. The exponential progress that has been accomplished over the past years shows that not only stablecoins are here to stay but we are still early. Very early.