Are stablecoins the future of crypto?
Stablecoins have been rapidly growing in popularity over the past year. This is mainly due to their reduced volatility and practicality in exchanging value. Read more to find out the implications of today’s stablecoins.
As the name suggests, stablecoins are cryptocurrencies that are pegged to an asset or fiat currency in order to minimize volatility. This results in a cryptocurrency that is stable in value. For example, the stablecoin USDT (Tether) is pegged to the US dollar, meaning that the price of 1 USDT is equal to the price of 1 US dollar and can be exchanged as such.
Stablecoins are a relatively new type of cryptocurrency, most having launched within the last few years, but are already taking over the crypto market in terms of trading volumes. Within the last 30 days (Feb 23 — Mar 24), the stablecoin USDT has done an average of approximately $100 billion in trading volumes per day. This completely overshadows the number one cryptocurrency by market cap, Bitcoin, which did about $66.6 billion within the same timeframe.
So what does this tell us?
This tells us that, despite USDT’s relatively smaller market cap (26 times smaller than Bitcoin as of the time of writing), it has a much larger 24h trading volume when compared to all other prominent cryptocurrencies. This trend of proportionately high trading volume in relation to its own market cap is seen in other stablecoins such as USDC, DAI, Binance USD, and more.
The high trading volumes are an indication that holders of these stablecoins are not hoarding them, rather, they are transacting with them in record numbers. In the particular case of USDT, its use case is due to the fact that many cryptocurrency exchanges could not access a bank account and therefore all transactions done over the platform are conducted using USDT.
Another reason, more tied to the greater adoption of cryptocurrencies, is because consumers and merchants who use cryptocurrency to exchange value are preferring to use stablecoins for such purposes. The long-term argument is that, because stablecoins are stable in value, there is far less volatility risk that a consumer, merchant, or even DeFi applications are willing to accept, compared to other, more volatile cryptocurrencies.
What are the limitations of stablecoins?
Questions regarding the viability of a stablecoin as a decentralized cryptocurrency are raised when you dig a little deeper into the mechanism behind them.
Typically, stablecoins are issued by a central issuer that issues the coins based on the collateral they have in reserve. For example, if there is $100 in reserve, then only 100 coins can be issued (assuming $1 is equal to 1 coin). Note, stablecoins can be backed by many kinds of collateral, such as precious metals, fiat currencies, other cryptocurrencies, oil, real estate, and other commodities or assets.
Furthermore, some stablecoins are usually implemented as smart contracts on another independent blockchain. Data then has to be fed into the blockchain by an oracle (typically the central issuer itself or some other third-party), since blockchains cannot be aware of what occurs outside the blockchain. As for the others, they are usually tied to a bank account with a 1:1 peg. In both cases, it tampers with decentralization.
Stablecoin critics point out the obvious flaw — that since stablecoins need a central authority/issuer to issue coins and maintain their stability, it defeats the purpose of a cryptocurrency. In the system outlined above, it is clear that stablecoins do not work as a decentralized, peer-to-peer network.
Because of this, there is a huge regulatory risk that stablecoin users and holders should be concerned with. Governments and other similar institutions often audit the reserves and practices of stablecoin issuers, and theoretically, can halt their operations if they choose to. This is in contrast to other existing cryptocurrencies that run on a decentralized network and do not have the regulatory same risk.
And since most stablecoins rely on oracles to feed information into the blockchain, it is therefore subject to tampering, manipulation, bias, fraud, etc. This puts the legitimacy of stablecoins into question, as a central authority can potentially change the price of the stablecoin or outright halt its activities.
Is there a better way?
Stablecoins definitely have their merits and practical uses, clearly as they are, generally speaking, the most transacted cryptocurrencies on the market currently. Their stable price is very attractive to people who wish to complete transactions and exchange value, as opposed to hoarding and speculating. This is due to its reduced risk towards extreme volatility that is seen in many other kinds of cryptocurrencies. However, the regulatory and centralization risk is an “elephant in the room” that stablecoin holders ought to discuss and protect themselves against.
Creating a truly decentralized, secure, and scalable cryptocurrency that is stable in the way it measures value without the need to peg on assets or fiat has been the goal of the Jax.Network blockchain project. Which is something that we strongly believe we have achieved in the form of our stablecoin “Jax Coin” which exists as one of two native digital currencies on our blockchain network.
The Jax.Network blockchain rewards miners based on the amount of computing power (hash power) they contribute to secure the network. As opposed to a fixed reward that is given per block on blockchains such as Bitcoin or Ethereum. And since miners are profit-oriented, new Jax Coins are minted and distributed following the law of supply and demand, achieving long-term stability at a steady-state without the need for a peg.
And since Jax Coins, are in a way, tethered to the computing power on the network, there is no need for an oracle to input data or a central issuer to issue coins. Indeed, regulatory and centralization vulnerabilities that are present in other stablecoins are absent within the Jax.Network blockchain.
To find out more about the Jax.Network project, its protocol, or any other additional information regarding the viability of Jax Coin, visit our official website at Jax.Network.