The Money of the Future includes Stablecoins. Here’s Why.

Stablecoins’ reason for existence is easy to understand.

Digital currencies, or cryptocurrencies, are quite volatile. This is due to their untethered and decentralised nature. There is, by design, no government body that can intervene and regulate their value. What makes digital currencies appealing and revolutionary can also make them scary.

That instability can make it difficult for buyers to figure out exchange rates and navigate the market. This is especially true if they aren’t too used to digital currencies.

The expectation is that once an economy develops around digital currencies, the market will mature. Adoption will also help with this. In the meantime, however, there is a market for solutions that fill that gap. Utrust’s payment platform, Utrust Pay, solves that problem for merchants. They can accept payments in digital currencies and get paid in fiat seamlessly. For buyers, stablecoins are an attractive solution.

How can you stabilize a decentralised currency?

There are several ways. Usually, cryptocurrencies are tethered to physical assets, meaning that they are collateralized off-chain:

Fiat-collateralized stablecoins — This is the most common method. It involves tethering the stablecoin value to a fiat currency. Stablecoins that do this will always be worth the same value as that of the fiat currency they are tethered to. To ensure this, you need a central custodian (such as a bank) that will hold $1 for every single stablecoin issued. Examples include TrueUSD (TUSD), USD Tether (USDT) or the Celo Dollar (cUSD);

Commodity-collateralized stablecoins — You can also tether the value of a stablecoin to any other asset. All you need is for the asset to be traded in an exchange. Examples include Digix Gold Tokens (DGX), that is backed by gold.

This is the most popular method to stabilize cryptocurrencies. And it is also quite controversial.

Collateralizing crypto off-chain is often accused of defeating the purpose altogether. Not everyone agrees, though. Doing it can give you the confidence to invest in something safer, since the technology is quite new.

Other methods to stabilize cryptocurrencies

There are two other ways to go about it:

Crypto-collateralized stablecoins — You can tether your stablecoin’s value to that of other digital currencies. This is trickier. The volatility of crypto is exactly what you’re trying to protect yourself against. Usually, doing this demands a vast amount of capital to get off the ground. The rule is that you deposit two, or even three tokens for every stablecoin you get. This is so the custodian can ensure that any market volatility is cushioned by sheer volume. One example of this is Dai, which is collateralized by Ethereum.

Non-collateralized stablecoins — You can not tether it at all! These stablecoins depend on complex sets of algorithms that will buy and sell the stablecoin automatically. The goal is to manipulate its value into stability. This method has fallen out of favor with investors, however. Some of the most prominent experiments have failed spectacularly (see NuBits).

None of these solutions are perfect. They all involve a measure of confidence, either in custodians or in the software itself. Besides, no asset is truly stable. Fiat currencies are also affected by market volatility, as are commodities. Nevertheless, by and large, stablecoins work.

Stablecoins are getting big

Stablecoins don’t have a long history.

They couldn’t very well have one, since digital currencies themselves are young.

The reality is that the first stablecoins launched as late as 2014. BitUSD, NuBits and Tether all launched then. They were the first to experiment with the concept in a real world scenario. A lot of early stablecoins failed. NuBits is the better known case.

The concept, however, remained attractive. Especially since stablecoins can be an effective gateway into digital currencies. Since 2017, over 200 projects have been announced. There are currently 66 active stablecoins on the market. Over half of them, 36, were announced in 2018.

This is a growing market. The largest study on the subject indicates that 2019/2020 will be the biggest years yet for stablecoin adoption and for the launching of new projects.

Stablecoin projects boast some very impressive numbers, with close to $2 billion raised in investment by the largest 15. Tether was responsible for half of that, thanks to an IEO related to the LEO token. They clearly lead the pack in terms of popularity, with a market cap of $4.1 billion.

Buying stablecoins is actually quite easy

All you need to do is find an exchange you like, deposit some funds, and purchase away. There are many exchanges available on the market. They’re all slightly different, providing different options for what you can trade. Here’s a handy beginner’s guide on how to purchase Tether. The process is similar for other stablecoins.

What’s next for stablecoins?

The future is bright, but it is also hard to predict. Stablecoins will continue to grow with mainstream adoption of digital currencies. People see them as a safer alternative. Some projects are in the works that have world-changing potential. These include Facebook’s Libra (which is tethered to the USD), or the Chinese government’s state-run digital currency. Until we understand the real impact of these massive undertakings, it is hard to pin down what the role of stablecoins will be as we build the money of the future.

Stablecoins have been suggested as possible solutions for myriad problems. Venezuela’s government issued its own Petro currency, backed by Venezuelan crude oil. Catherine Coley, the CEO of Binance US, has recently suggested that stablecoins could be used to provide financial relief to citizens during the COVID19 crisis.

Whatever the future holds for stablecoins, they will always be a part of the conversation as digital currencies continue to blaze their path to full adoption. Utrust has planned for this, and we have already introduced a stablecoin to our offering.

Whether you’re a merchant, looking to expand your online presence and reach new markets, or whether you’re a potential customer, seeking better ways to use your money, now is the time to join us on this journey.