A to Z of stablecoins: Why and where to buy them
While bitcoin is the most famous and popular cryptocurrency on the market, it is not always the most useful one. Part of the power of cryptocurrencies is that they can easily be transferred across borders securely, anonymously, fast and at a very low cost. However, when it comes to bitcoin and many other popular altcoins, volatile prices and sometimes high transaction fees hinder them from being fully adopted into a global, mainstream payment system.
For such a payment system, stablecoins are much better suited. As such, we believe stablecoins play an incredibly important role in driving the future of cryptocurrency and blockchain technology.
Stablecoins explained
A stablecoin is a cryptocurrency based on a public blockchain with its value tied to a national fiat currency. Just as with bitcoin and altcoins, stablecoins are created on a blockchain, are publicly auditable and can be traded on exchanges which support them. They offer the benefit of fiat currency in terms of their relative stability and the benefit of crypto as a digital coin.
Stablecoins can be either trusted or trustless.
Trusted stablecoins are backed up the same value in fiat currency, held in reserves by the token supplier. For example, a company could issue one 1 crypto dollar in exchange for 1 US dollar. Although you’d own that crypto dollar and would be free to transfer that dollar to someone else, the value of that coin always relies on the issuing company. You would need to trust the company to be good for the money, if ever you or someone else would want to revert your crypto dollar back to fiat.
Trustless stablecoins are collateralized differently and at Bitspark we prefer them precisely for that reason. Trustless stablecoins rely on a smart contract, can be audited on the blockchain and are not dependent on any third party. Although pegged to the value of a fiat currency, they are backed up by a corresponding value in cryptocurrency. Bitshares-based stablecoins are backed up by BTS, whereas MKR DAO is backed up by ETH.
Actually, trustless stablecoins are over-collateralized. Say, instead of 1 Philippine Peso worth of BTS, one peg.PHP (which is a Bitshares-based stablecoin pegged to the national currency of the Philippines) must always be collateralized by at least 1.75 times its value. This is to ensure that despite Bitshares’ volatility, the peg.PHP is always sufficiently backed up.
If for any reason, the value of Bitshares were to drop to such an extent that the collateral of one peg.PHP falls below 1.75, the collateral in BTS is automatically sold off on the market. To significantly lower the chances of this happening, the collateral backing up trustless stablecoins like peg.PHP or bitCNY is usually much higher, more than double or even triple the amount of the stablecoin’s value.
What makes stablecoins useful?
Since stablecoins are designed to be stable, unlike bitcoin and altcoins they are not bought into as an investment. However, as some exchanges don’t offer the option of obtaining crypto with fiat, stablecoins can be used as a means to purchase crypto, or if for some reason you would want to move out of a certain currency for a while, stablecoins can be a good option to keep your funds relatively safe.
However, the utility of stablecoins is especially apparent in the context of cross-border money transfers. While bitcoin or altcoins could potentially meet the needs of cross-border money transfers such as remittances or international payments, apart from issues with volatility this would only work in countries where there is enough local fiat liquidity.
In other words, if you were to set up a business in Cambodia and intend to accept bitcoin payments, you need to be sure you can exchange bitcoin for Cambodian Riel consistently. In most countries, such fiat liquidity in relation to crypto is not sufficient or in some cases simply non-existent.
Trustless stablecoins can be pegged to any currency, generated from anywhere. They are tradeable and as such don’t pose the usual currency risks. Their usefulness is clear in the context of remittances.
With Bitspark, for example, if someone was looking to send money from Hong Kong to The Philippines, they would visit a local Money Transfer Operator (MTO), affiliated with Bitspark, pay cash in HKD in exchange for the same amount in peg.PHP on their phone, and transfer the money to their contact in The Philippines who is then able to trade their crypto for cash in Philippine Peso. The MTO, in the Philippines, can then trade these stablecoins on Bitspark’s decentralised exchange for other currencies, or trade locally with other (more cash-heavy) MTOs or anyone locally looking to exchange their cash for another currency.
In addition to solving crypto-fiat liquidity issues, and their non-volatile nature, stablecoins are useful because they promote financial inclusion: They can serve bankless populations, cash-economies, or those that simply don’t trust their local banks. Also, as they are derived from and handled on the blockchain, trustless stablecoins offer both privacy and transparency simultaneously.
Where can stablecoins be bought?
Stablecoins can be bought on a number of exchanges including Sparkdex, Bitspark’s decentralised exchange.
Some exchanges such as Coinbase and Binance enable users to purchase crypto with their credit card. At Bitspark, in addition to obtaining stablecoins from our exchange, stablecoins can also be purchased with cash at any of our affiliated Money Transfer Operators in over 100,000 locations.
If you’re looking to use stablecoins as part of your business model, it will be important to know whether it’s a trusted or trustless coin, which exchanges support it, and your method of reverting back to fiat, if need be.
In our ecosystem, that includes an exchange, mobile app, web platform and our network of MTOs, we currently support BitGOLD, BitEUR, BitUSD, BitCNY, BitJPY, BitRUBLE, Sparkdex.HKD and more. Eventually, as we continue to grow our network of MTOs globally and extend our reach to include more bankless populations, entrepreneurs, families in cash-based economies and businesses, we will work to create more stablecoins pegged to any of the world’s 180+ fiat currencies.
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