If there is one word that would never be used to describe cryptocurrencies as we know them today, it’s - stable. Digital coins are notorious for their volatility, so who in their right mind would call them stable?

Well, a new type of altcoin called Stablecoin aims to change that very notion.

A stablecoin is a type of cryptocurrency with a fixed price. However, a more accurate definition of this is that a stablecoin is a digital coin pegged to another relatively stable asset, like the US dollar. Although, it has no ties to a central bank and has low volatility.

Holy Grail

Perhaps long-time fans of cryptocurrency will be outraged by the idea of stablecoins. Crypto tokens were made to be an alternative to fiat currencies. So why introduce a cryptocurrency whose price imitates that of a fiat currency?

Experts backing stablecoins believe that cryptocurrencies will never be used as a medium of exchange in the real world if they remain too volatile. While Bitcoin was initially created to serve as digital cash, it evolved into a store of value instead, since it has not yet achieved real-world adoption. But Bitcoin as a store of value is still risky business. We all witnessed how much its value fell right after it reached its highest peak in 2017. If it was treated as an actual form of money, this volatility would be quite inconvenient. But with stablecoins in the picture, experts believe cryptocurrencies have a greater chance of being widely adopted. Hence, stablecoins are often referred to as the holy grail of cryptocurrencies.

Fiat-collateralized

Stablecoins have many different types, and the most popular type is fiat-collateralized. This refers to a stablecoin that’s supported by a real-world fiat asset. Currently, Tether is the most well-known stablecoin that’s fiat-collateralized. One Tether is supposed to have a value equal to 1 US dollar, which means that for every Tether coin you have in your digital wallet, there is one dollar sitting in a vault validating that value.

To be fair, Tether is more famous now because of the subpoena served to its auditors regarding its USD reserves. Monax founder and blockchain consultant Preston Byrne explains that this issue could spell the end of stablecoins because there will be people selling shares that are not even connected to the actual assets. Tether’s controversy indicates one of the main issues traders have with fiat-collateralization - the reliance on the central entity holding the reserves. After all, the reason why cryptocurrencies were attractive in the first place was that there was no third party involved. However, with centralization, you can still count on the price of a fiat-collateralized stablecoin not moving an inch.

Crypto-collateralized

For those who don't want to be stuck between a rock and a hard place, the option of crypto-collateralized stablecoins also exists. Instead of fiat currency, this type of stablecoin is backed by another cryptocurrency. If you don’t fancy the centralized aspect of fiat-collateralized stablecoins, you can go for the decentralized, crypto-supported stable token instead. One popular example of a crypto-collateralized stablecoin is MakerDAO. However, there’s the volatility aspect to worry about.

Usually, these coins peg a mix of cryptocurrencies rather than a single one, since doing so allows for better risk distribution. That’s why they are often over-collateralized so that they can remain “stable” if their crypto supports are affected by price fluctuations. The main frustration users have, however, is that this type has many complex elements to consider. So, don’t dive into it if your head’s not ready!

Commodity-backed

This brings us to the last, but definitely not the least, type of stablecoin. In contrast to the prior two types discussed, commodity-backed stablecoins are pegged to commodities that are interchangeable for trading in the same market. These stablecoins usually get the support of precious metals, usually gold, which are viewed as a good store of value. FXCM state that traders consider gold as a haven since its value doesn’t depreciate during market recessions. Some traders store actual gold coins and jewelry, while others trade in futures and contracts. For a stablecoin backed by gold, one coin would represent 1 gram of gold. So yes, there should be a gram of gold lying somewhere in order to back the stablecoin’s value. Examples of these include Malaysia's HelloGold and Germany's Karatgold.

Commodity-collateralized stablecoins are not as popular as fiat-backed ones, but they provide another option for people who still want to transact with tokens supported by real, tangible value. Then again, there’s the fact that these stablecoins are centralized. Furthermore, the audit process is a lot more expensive and time-consuming. You must consider how difficult it is to move metals around.

Is there a stable future?





Haseeb Qureshi, “Stablecoins: designing a price-stable cryptocurrency”

By now, you’re probably thinking stablecoins are just another fad in the cryptosphere. But the idea does hold some true potential. If established properly, stablecoins could pave the way for mass adoption. For stablecoins to blow up on a global scale, Coin Telegraph highlights the need for developers to address the privacy aspect of stablecoins, since blockchain ledgers are not ideal to keep business interests and relationships safe. Some messiah would need to create a new system that can obtain the exchange rate of the coin and the pegged asset without having to rely on a third-party institution, which can be manipulated.

As of now, stablecoin projects are still experimental. However, if people figure out how to patch up the holes (we’re looking at you Tether), stablecoins can be a solid solution for global adoption. Imagine having a digital currency that could weather the storm and deal with any price fluctuation! This could signal the end of hyperinflation, as well as eliminate the power of a central entity. Not to mention it would also remove fraud and mismanagement, from which many economies suffer.

Jeremy Smith