Stable Coins: The Best of Both Worlds?
In the past, we have witnessed Bitcoin gaining hundreds of dollars in a matter of minutes and also nose-diving at a similar pace. Not only Bitcoin, but there are many other cryptocurrencies whose prices peak and fall. Volatility is one of the biggest hurdles for the masses to integrate crypto into their daily life and it is hampering the dream of mass adoption. A few are aiming to address this with the introduction of stable coins and they have had success to a certain extent.
In this post, ChangeHero will introduce you to the concept of stable coins, their peculiarities and impact on the mass adoption.
Stable coins
On any given day, the traditional cryptocurrencies, would experience a 10–20% increase or decrease and there are multiple factors contributing to this change. It is very inconvenient for the public to use cryptocurrencies with high volatility for everyday transactions as the price fluctuates every second. Stable coins are considerably new and resemble the fiat currency that people use for spending every day. This form of digital currency aims to minimize volatility and offer a consistent value irrespective of the factors affecting the cryptocurrency markets. As a means to stabilize the value, stable coins are backed by a reserve asset. Also, stable coins function as a safe place for users to store their assets and not worry about the price swings. Usually, these are pegged to U.S. dollar or a commodity or even other cryptocurrencies
Fiat-collateralized
Tether was the first stable coin available to the users for trading in 2015. It was built on the Omnichain protocol and pegged to the USD at a 1:1 ratio which means that 1 USDT token will always be equal to $1, theoretically. In terms of the use case, it bridges the gap between the cryptocurrencies and fiat along with providing stability, transparency and security. Most often, we see traders selling off their assets to USDT on exchanges before withdrawing to protect their profits. With a market cap of over $4 Billion, it is one of the most valuable cryptocurrencies in the market, at the moment. It is completely dominant in the stable coins market and operates on various chains such as Ethereum, Tron, EOSIO and Liquid. Tether is well established in the market and integrated into all the top exchanges. Despite the wide usage, its centralized nature is criticized often and has a history of hacks.
TrueUSD is another popular fiat-collateralized stable coin. It is the first ERC-20 token fully backed by USD and raised an impressive $20 million in 2018. The token stands out from the rest in terms of transparency and discloses the details of escrow accounts daily. There are also a ton of other similar projects such as Gemini USD, Paxos Standard and USDCoin in the market.
Crypto-collateralized
MakerDAO is another name often heard in the stable coins market. The project is well-known for its off-beat approach to stabilizing the currency. Unlike Tether, DAI is crypto collateralized and backed by ETH. It is one of the first stable coins to be completely decentralized. Each DAI token will be equal to $1 and the platform uses CDP (Collateralized Debt Position) smart contracts to lend DAI to the users. In late 2019, MakerDAO introduced multi-collateral DAI adding support to BAT initially and other tokens may also join the club in future. The single collateral coin was renamed as SAI while the new multi-collateral asset took the name DAI. Though the project is applauded for its autonomous and decentralized nature, its stability fees structure has always been a controversy.
Algorithmic
These kinds of stable coins attempt to maintain stability in the value of the cryptocurrency through algorithms. Basecoin is one such stable coin which was announced back in 2017 pegged to the USD. The stability of the price was planned to be maintained through a consensus mechanism in which the supply of the tokens is adjusted according to the exchange rate between the coin and its peg. The approach is similar to the Central Banks and was criticized by many in the crypto community. Though the project gained a good amount of initial funding, later it went into exile and is nowhere to be heard of in 2020.
Best of both worlds? Not yet!
Stability, Scalability, Privacy and Decentralization are the vital characteristics of a cryptocurrency which the whole community dreams about. Stable coins do cater the consumers with stability, but fall short in the rest, especially in the decentralization due to the involvement of third parties. On a closer look, all these stable coins are being used as a stop-loss tool. Traders simply exchange their crypto to stable coins in order to avoid the loss of profits due to volatility. In a nutshell, stablecoins are far from delivering the best of both worlds, at least for now.
Mass adoption would be possible only when an average person is able to use a cryptocurrency on a daily basis, but stable coin usage is not seen often in such scenarios. This is mostly due to the lack of awareness of the existence and the benefits of stable coins in public. We have been hearing news about JP Morgan and IBM releasing their own stable cryptocurrency. Moreover, the topic of stablecoins cannot be concluded without mentioning Facebook Libra’s hard times. Though these projects contradict the true nature of decentralization, they would fuel the awareness of stable coins and ultimately lead to mass adoption.
On ChangeHero you can exchange USDT, USDC and TUSD with all the popular cryptocurrencies at the best rates. You can instantly swap your crypto assets to stable coins without any registration or logins. Do give it a shot! As always, follow ChangeHero on Twitter and Medium for more of such informative article and be the first to get notified for exciting offers.
