Usually no one takes a look when the price of a cryptocurrency drops by 30% over a week. It's the Wild West, after all.

But when he arrived at DAI this month, the heads turned, mainly because the token was designed specifically to hold his ankle with the US dollar.

These crypto-currencies are an increasing number of cryptographic tokens called "stablecoins", which are designed to adjust their supply as the market evolves, emitting when prices rise and retract when they fall.

Called the "Holy Grail" of cryptocurrency, stablecoins have been touted as a way to strengthen the business argument for blockchains, since many companies avoid the volatility associated with the sector.

Example: An increasing number of decentralized applications (Dapps) rely on the ether, and on ether-dependent internal cryptographic tokens, as a means of distributing value. As a result, unpredictable changes in the price of the ether market could cause chaos in the system.

Dapp users would be less likely to spend their chips if they thought the value could double overnight. Conversely. If potential users suspect that the value of the Dapp tokens will plummet, it may discourage them from participating.

For this reason, Rune Christensen, the founder of MakerDAO, the company behind the DAI Stablecoin, which was launched in December, said CoinDesk:

"[Stablecoins] is the first step before you see anything of interest … I would say the reason the blockchain world is so vigilant … c & # 39; is because you can not do business an unstable environment. "

And in this quest for stability, interest in refining stablecoin technology appears to be on the rise in 2018.

Not only a group of star investors, including Andreessen Horowitz and Pantera Capital, backed a stable project called basecoin in October, but CoinDesk has heard of other projects of this type coming up.

In addition, the popularity of BitCNY in China – which is related to the Chinese renminbi and has completely replaced renminbi pairs due to the strict regulation of fiat / crypto trading in the country – led Christensen to describe Stablecoins as " the best example of blockchain is just for the moment. "

Yet, according to critics, the brief DAI trading period of around 72 cents only prefigures an impending spell that the market has already seen many times with stablecoins.

A harmful beginning

While stablecoins see tens of billions of dollars worth of transactions a day, many crypto enthusiasts have called the technology a "single point of failure" for the crypto industry as a whole .

Preston Byrne, an independent consultant and former chief operating and legal counsel of Monax Industries, even went so far as to call Stablecoins "the dumbest creature of the entire universe," alluding to the Bugblatter beast of "The". Guide to the hitchhiker on the galaxy . "

And such criticisms are not entirely unfounded.

Perhaps the best known of the stablecoins is the USDT (Link US Dollar), which serves as a replica for the dollar on some of the world's largest cryptocurrency exchanges. And while this feature seems to validate its existence, the company behind the piece, Tether Limited, has seen its share of controversy.

For example, last year, Tether Limited was allegedly hacked for $ 30 million in USDT.

And in a wave of recent accusations, the relationship between Tether Limited and the Bitfinex exchange has been severely criticized.

While the US dollar Tether crypto has been in existence since July 2014, formerly known as Realcoin, Bitfinex, under tremendous pressure after losing its banking relationships and ability to send money transfers, ushered in wider use of the Tether solution. 2015. The USDT is widely considered a substitute for traditional banking services, allowing users to quickly withdraw and deposit dollar amounts.

But since then, there has been a lot of scrutiny of the close ties between Bitfinex and Tether (companies have common ownership and management) and charges of mismanagement. Some, especially the pseudonymous blogger "Bitfinexed", went so far as to claim that the USDT has no material base, and is instead regularly injected into the market to drive up the price of bitcoin.

Contacted this week, Tether's representatives did not respond to a request for comment by the time press. In December, a spokesman for Bitfinex and Tether said that an upcoming check would show that the tokens were fully secured. The company has also threatened to file a lawsuit against its online critics.

Similar problems have also haunted NuShares after the NuBits stablecoin distribution in 2016.

Although the project aimed to maintain the stability of the currency through economic incentives, following a wave of piracy and alleged manipulation of stakeholder anchoring, the stablecoin traded at 10 cents the same year.

At the time, NuBits' lead developer, Jordan Lee, attributed the mistakes made in the community's "suicidal tendencies."

Small numbers, big mistakes?

Similarly, critics of the concept cite the suspension of BitUSD trading, which is perhaps the first stablecoin, on BitShares trading in 2014 after a security bug was found in the code.

Yet remarkably, over the next four years, BitUSD has mostly maintained parity – although "most of the time" is still problematic.

Last week, BitUSD reached $ 1.10 per coin, according to CoinMarketCap. Small deviations of this type could encourage traders to take advantage of them.

As Christensen said: "If you buy an IED at just under a dollar and sell an ICD at a little more than a dollar, in a dollar-denominated market, that's a good deal. is like a very simple way to arbitrate the inefficiencies of the market. "

However, Christensen said, the minute price fluctuations that these stablecoins seem to have on CoinMarketCap do not translate into the price of currencies on individual exchanges.

Rather, due to the way CoinMarketCap calculates the average price of cryptocurrencies, "there will always be this apparent volatility effect on the price charts," he said.

For him, it does not make sense to pretend that technology is not working simply because it is considered a trap because today there are stabilizations in the market.

"BitUSD is one of the first very good examples of a smart contract or a blockchain 2.0 technology working really well and in particular, providing real world utility in a way that almost no other blockchain has done before, "Christensen said.

Gross Infrastructure

However, according to Christensen, discrepancies between CoinMarketCap and the exchanges where the DAI is traded were not responsible for the fall of this coin last week.

On the contrary, these price fluctuations, speculated Christensen, were due to a stock market that has been trading on the Chinese stock market, Bibox. When this market maker fell, another high-frequency trading robot began to skew the price, he suggested. Highlighting his point of view, DAI traded for $ 1.10 on another exchange, Gatecoin, the same day he went to 72 cents on Bibox.

And this volatility scares away crypto enthusiasts, who worry about a possible "black swan event" or a "spiral of death". In such a scenario, the assets of a base is abruptly reduced and, in turn, lowers stability and, with it, the entire crypto market of billions of dollars.

But as these technologies progress, the creators of stablecoin take precautions.

For example, the team behind MakerDAO said that it has mitigated the possibility of a spiral of death by tying DAI to a diverse range of support assets.

"So [a black swan event] is highly theoretical and should only occur under conditions of extreme neglect, and with appropriate diversification, it should theoretically be possible to prevent with 99.9% certainty," Christensen said. at CoinDesk

.

And all these instances seem to show that the technology, and the surrounding crypto infrastructure, is still so new that one has to wait for hiccups.

"Markets at a very early stage for a new stablecoin are certainly among the strangest market conditions," Christensen said.

He compared the fall of DAI to the price drop of BitUSD after its launch, explaining that before these stablecoins become widely traded in a particular market, they are vulnerable to bots and bugs.

As Andy Milenius, a developer of MakerDAO, told CoinDesk:

"When the DAI volume is several tens of millions and that it is then showing volatility, we will have something interesting to tell."

Colorful Jenga blocks the image via Shutterstock

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