In almost ten years since Bitcoin’s creation, the crypto community has already come very far in terms of adoption, popularity, and framework. While cryptos still have thousands of leagues to cover before they become as accepted as fiat money in making payments.
In this regard, the world can be seen to be at opposites: those who are totally into cryptos and those that are totally not into cryptos. But the idea would now seem obsolete at best, as stablecoins are already beginning to take the spotlight and become a compromise both parties are willing to make.
Could stablecoins finally close the gap between fiat money and digital currency?
In A Nutshell
Stablecoins are digital assets which are engineered to be pegged to a real-world asset, like gold and other precious metals, or a fiat currency, like the US dollar; the most popular stablecoins are pegged to the latter. Regardless of any external or internal factors, like cryptocurrencies having a bull run, stablecoins will stay faithful to the specified asset where it is pegged to. The same can be said if the price of cryptos drops.
There are two major classifications of stablecoins: reserve-backed and algorithmic. The former functions like the US dollar when it was linked to the gold standard, while the latter is controlled by an algorithm. Majority of stablecoins are reserve-backed, as it is more complicated to create the latter.
Despite advantages over fiat money, cryptocurrencies have their own issues to address, and one of the most common is its price volatility. That is what stablecoins have come to address. No matter how the market behaves, these digital tokens will strive to be “stable” in price.
On the other hand, stablecoins possess some attributes of cryptocurrencies, one of which is the ability to be transferred digitally and with ease.
But many industry players are exploring deeper into the technology, claiming that stablecoins could allow for far more complex financial products and services. One example is IBM, which recently launched its Blockchain World Wire, a cross-border payments platform which the tech giant claims will make it possible for financial institutions to facilitate cross-border payments in “near real-time”.
The payments platform makes use of cryptocurrencies, be it a stablecoin, a central bank-backed cryptocurrency, or any other cryptocurrency for that matter.
King Of Stablecoins
With over $2.8 Billion in market capitalization, Tether is arguably the king of stablecoins. It follows immediately after Litecoin, and is the sole stablecoin in the top 10 cryptocurrencies, according to CoinMarketCap.
Tether (USDT) is pegged to the US dollar, which it attempts to do so faithfully. So far, it remains uncontested in the stablecoin race.
However, the stablecoin is not immune to controversies; many are alleging that it does not hold enough dollar reserves to fully back the ones in circulation.
In June, Freeh Sporkin & Sullivan LLP set to find out whether Tether is indeed putting its money where its mouth is—if it has real money deposited in its bank accounts. The law firm backed Tether’s claim, even though it did not conduct an official audit. Referring to the investigation, Tether’s General Counsel Stuart Hoegner said that “the bottom line is an audit cannot be obtained.”
Stablecoin Arms Race
But Tether’s dominance is constantly being challenged by many stablecoins, some of which are even backed by industry juggernauts.
Earlier, IBM partnered with blockchain startup Stronghold to create the eponymous Stronghold USD, which is also designed to match the US dollar 1:1. Circle, a Goldman Sachs-backed firm, also announced the creation of USD Coin (USDC), which is already accessible on its own Poloniex exchange and Circle Trade.
De Facto Internet Money
Recently, Silicon Valley-based venture capital firm Andreessen Horowitz announced that it has invested $15 Million in MakerDAO, a stablecoin project built on the Ethereum network. The project is designed to create a system which can stabilize the price of another cryptocurrency it mints—Dai—which is pegged to the US dollar and backed by Ethereum as collateral.
The deal was spearheaded by Kathryn Haun, a notable prosecutor who once worked at the US Justice Department, and now co-leads one of Andreessen Horowitz’ crypto investments.
Co-partners Jesse Walden and Katie Haun wrote in a blog:
“That’s why so many crypto projects—from digital goods marketplaces and lending platforms to decentralized exchanges and prediction markets—are working to integrate stablecoins. With each integration, the overall ecosystem of decentralized applications becomes more accessible. This will also drive strong user network effects around stablecoins as de facto internet money.”
“Any big major institution that has a lot of centralized power is being called into question,” said Haun in an article by Fortune. “We think that it’s always important to look to what the solution to some of those things could be.”
For her, cryptocurrency is powerful because it puts back the power into the hands of people. As someone who had experienced living in different countries around the world, Haun was fascinated by how cryptocurrencies could transcend boundaries and allow those who do not have adequate access to basic financial services to find the same potential services in digital assets.
Still In Dial-Up
In a recent debate, Haun explained that cryptocurrencies are one of the very few weapons that we can use to reclaim the power that has long been gobbled up by centralized institutions. “Facebook, Amazon, Netflix, Google, they control all the rules,” she said. “They have all the users. They have all the power.”
But for Haun, cryptocurrency is still in the “dial-up days,” and the mistake of others, especially the detractors, is that they are “confusing the current state of innovation with the end state of innovation.”
Perhaps many first-generation cryptocurrencies that have scalability and volatility issues are the chief targets of crypto cynics and bears. But the same cannot be said of stablecoins. Even though they also struggle in terms of scalability, but at least they got one issue fixed already: volatility.
Just like IBM Blockchain World Wire, stablecoins can be used for more ways than one. Perhaps they may become an avenue for a better set of cryptos to emerge. Perhaps developers would come of a way to solve its scalability issues.
But one thing’s for sure: a lot more can be done. As Haun said, cryptos are still in “dial-up.”
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