In 2017, ICOs were all the rage and they were bringing in millions of dollars in investments, but as crypto winter thaws, interest for real-world crypto applications is returning and people are being a bit more careful with whom they’re investing. While interest in cryptocurrency continues to grow, there seems to be a shift in which type of cryptocurrency is gaining interest. That’s where stablecoin comes in and how it could shape the future of money.
Certainly, we all know that cryptocurrency has a certain amount of volatility, which has often prevented widespread adoption in crypto as a store of value. And because they are subject to huge fluctuations, they often do not represent a proper means of exchange or unit of account. Indeed, no business would likely accept digital currency when their value can drastically drop the next day. If a vendor accepts $24 in crypto for a shirt but crypto is worth $15 the next day, they’re going to be out of business!
Volatility has led to several gold bugs and experts calling Bitcoin a bubble; it also makes it difficult for anyone to accept a currency as a “unit,” since there is no common acceptance on how much it may be, or will be worth from one moment to the next. A measuring unit, by definition, should remain stable. So volatility transforms what were meant to be cryptocurrencies into speculative crypto-assets. With less volatility, crypto-assets may have made a decade’s worth of progress in a year.
Stablecoins pegged to local currencies and other types of asset-backed cryptocurrencies are designed to play a major role in the future of crypto adoption. With over 230 stablecoins in the market, here’s all you need to know about one of the most active sectors in blockchain tech.
What are stablecoins?
Stablecoins are a cryptocurrency whose price is not determined by direct trading activity, instead it is pegged to the value of an asset. Know the difference between commodity backed coins and stablecoins here. The most common stablecoins are pegged to national fiat currencies such as BitUSD, BitCNY, stable.PHP, sparkdex.HKD and DAO which are tied to the Chinese Renminbi, Philippine Peso, Hong Kong Dollar, and USD respectively.
What are the types of stablecoins?
There are 3 types of stablecoin:
- Fiat collateralized
- Crypto collateralized
This type of stablecoin is collateralized by an equal amount of fiat currency, usually held by a central authority. Simply put, when you send one USD to the custodian and get one crypto token in return. Holders of these tokens are then guaranteed the option, at any time, to redeem their token for fiat again. This type of stablecoin includes tokens such as Tether and TrueUSD, but also Digix, which is backed up by an equal value in gold.
Basically, these stablecoins are backed up by another cryptocurrency which unlike their fiat collateralized counterparts makes it possible to keep third parties like a central custodian, out of the equation. Crypto collateralized stablecoins are generally over-collateralized meaning that as the price of the base cryptocurrency fluctuates, the price of the stablecoin is still unaffected. A good example of this type is BitAssets which includes stablecoins like BitUSD, BitCNY and BitEUR. Each of these stablecoins is backed up through a smart contract at all times by at least 200% of their value in BitShares (BTS).
This type of stablecoin is still in its experimental phase. It maintains stability using smart contracts which are programmed in a way to increase and decrease the supply of the stablecoin in question to counter fluctuations on the market: when the stablecoin trades too high, it creates more tokens, and when the stablecoin drops in price, it buys up circulating coins to reduce the supply and thus increase the value. NuBits is a good example of this type of stablecoin however, while NuBits is promising, it has not yet proven itself stable enough for mass adoption.
Stablecoins Overview : 2017 – 2019
2019 has proven a huge year for the development of stablecoins and DeFi, particularly in regards to projects built on the Ethereum blockchain. Since the beginning of 2017, over 200 projects have been announced, but only 30% are yet to be publicly launched, with 66 public and active stable coins in circulation at the time of writing.
Of the stablecoins that have launched, 50% of all active stablecoins are developed on the Ethereum network. Further, USD-backed stablecoins like Tether, Coinbase’s USDCoin, and Gemini’s Gemini Dollar are the most active, while those backed by gold are the most likely to fail.
How do stablecoins solve real problems?
The real-world applications of stablecoins excite users and will drive the future of crypto adoption. It’s a revolution of bankless digital money that is accessible to everyone. Here are a few stablecoins that solve real problems.
This global cash-in cash-out payments network relies on stablecoins to effect transactions quicker and cheaper than any other traditional payment channels such as bank transfers or retail services like Western Union. In any of the 100,000 locations affiliated with the Bitspark network, anyone can bring cash to convert into stablecoin and vice versa. From the Bitspark mobile app, the stablecoin can then be sent to someone else in a different country to be cashed out in the local currency, or exchanged for any of the other coins available on Bitspark.
Okra provides accessible and affordable energy in communities living in off-grid locations around the world. The community they serve in Palawan, a remote island in the Philippines, uses stablecoin stable. PHP to pay for their solar energy bills. The ability to turn cash into digital money has connected it to a global financial network – something that was previously inaccessible to the ‘unbanked’ community of Palawan.
USDC is Coinbase’s dollar-pegged currency. Every USD Coin is worth $1 and can be redeemed for cash. The coin also functions like cryptocurrency and can be sent anywhere with no fees. USD Coin is an Ethereum token, so you can store it in an Ethereum-compatible wallet, like Coinbase Wallet.
It is a USD-backed stable cryptocurrency (TUSD) focusing on transparency, built on Ethereum. The supply of TUSD is collateralized by USD held in escrow by banks. Tokens can be purchased and redeemed for US dollars on the TrustToken website.
Who is leading the race to the top?
The future of crypto adoption certainly rests with stablecoins, but there is no one particular project or organisation leading the race yet. However, this may change when mainstream tech companies with a powerful combination of resources and scale move into the stablecoin space. With social media giant Facebook’s announcement of Libra’s launch, a new era of stablecoins has ushered in.
On the other hand, there is also every chance that stablecoin adoption will be driven by the necessity of more reliable currencies in developing countries. Citizens living with hyperinflation in countries such as Venezuela, Zimbabwe and Angola would more than likely welcome and embrace a digital coin they can actually count on. As the world becomes more globally interconnected, we simply need a reliable, stable, and digital currency that everyone has access to.
Which is the most popular blockchain for stablecoins?
Ethereum is the leader with 33 stablecoins developed atop the protocol. BitShares comes in second with eight stablecoins, and Stellar rounds out the pack at third with six stablecoins. Ethereum’s dominance is due to a number of reasons. First, Ethereum benefited from its first-mover advantage and early projects like MakerDAO opted to issue DAI on top of Ethereum. Secondly, stablecoins on Ethereum benefit from robust existing infrastructure and the ease of using ERC-20 token standards. For example, there’s already compatibility with wallets, exchanges, and analysis tools like Alethio, Etherscan, MyCrypto, and more. When new stablecoins intend to expand and grow rapidly, it’s easier to do so on Ethereum as opposed to other blockchains.
Funding in the stablecoin ecosystem
Initial exchange offerings have been trending in 2019 as a new way to raise capital in the crypto industry. Notably, Tether completed an IEO raising over $1 billion dollars. While Tether outperformed its competition in terms of fundraising, other top stablecoins projects and companies still raised over $500 million in capital over the past two years. For example, Coinbase’s USD Coin raised over $200 million through three funding rounds.
Venture capitalists understand that if a stablecoin succeeds, it could generate impressive profits. Top firms, like Digital Currency Group and Andreessen Horowitz have heavily invested in crypto, specifically in stablecoins. Nearly half of all active stablecoins are venture-backed. While the pioneering stablecoins such as Tether, TrustToken, and DAI still hold a predominant amount of market share, competition is rapidly approaching.
To be clear, sometimes projects fail no matter how much much and backing is thrown at it, but the drastic increase in stablecoins over the past two years clearly demonstrates that many individuals, entrepreneurs, and businesses believe stablecoins will have a large impact on the world and its economy.
As more stablecoins are pegged to commodities and different currencies, there will be a lot more mobility between traditional markets and crypto. This is something we’re already seeing with existing stablecoins. In addition to offering bitUSD, bitEUR, and bitJPY, more stablecoins are being developed for countries like the Hong Kong Dollar, the Philippine Peso, and Venezuela’s Petro, just to name a few. The future will see many more bridges between fiat and crypto and stablecoins will pave the way into the future of money.
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