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What are stablecoins and why are they important?

January 10, 2019

The emergence of stablecoins has arguably been one of the most important events to occur in the digital asset industry. Their appearance is almost as significant as the release of Altcoins or the launch of Bitcoin futures contracts. We have briefly mentioned this topic in our 2019 prognosis already, while this article will focus solely on the stablecoins.

Stablecoins provide an easy, yet a controversial solution to the biggest problem for digital asset holders: volatility. In a market where the price of the assets you hold is always changing, you need the option to store your funds in a place where the value will stay intact, while still being able to spend and transfer it like any other digital asset.

Stablecoin is a new type of currency, it is designed in a way that minimizes price volatility and is pegged to another stable asset, like gold or U.S Dollar. It’s a currency that has the potential to be global but is not tied to a central bank.

 

Centralized and Decentralized

The main concept concerning digital assets - decentralization, is also central to stablecoins. There are 2 types of them - centralized and decentralized. All of the examples above are those of centralized stablecoins, they are linked to real currencies or to exchange-traded commodities (such as precious or industrial metals). Stablecoins backed by currencies or commodities directly are centralized, whereas those leveraging other coins like bitcoin or ethereium are referred to as decentralized.

 

Examples

The most popular centralized stablecoin is Tether (USDT), which has become the 8th largest cryptocurrency by market cap and is second after Bitcoin in terms of highest daily trading volumes.

However, a lot of controversies surround Tether. Suspicions have arisen that the stablecoin is not really backed by US dollars, as the company has yet to agree to a transparent audit. Tether has also been accused of causing Bitcoin price manipulation.

Another example is Gemini. The ‘Gemini Dollar’ (GUSD) also claims to be pegged 1-to-1 with the US dollar, however, what sets it apart from USDT and other stablecoins is their emphasis on transparency and regulatory compliance.

Centralized stablecoins are spread globally and are connected to different currencies. US, UK and Switzerland are the most popular locations for stablecoin launch.

In total, there are at least 57 stablecoins and the vast majority of them are centralized. Example of stablecoin that claims to be decentralized is DAI. DAI is an Ethereum based Stablecoin. It differs from others because it implements a fully decentralized technology. Its price is stable and is backed by Ethereum and not by USD.

 

Conclusion

Stablecoins do have a role to play in shaping the future of digital assets. In the past, Stablecoins raised some concerns, especially whether they truly are backed by the number of dollars that they have claimed. Now, with the maturing of the market in general, we are seeing various companies finding institutional support that has helped them gain trust, like USDC, which is endorsed by Goldman Sachs and Circle for instance.

The advancement of Stablecoins will probably depend heavily on the way in which volatility affects the growing market. Volatility provided problems in terms of digital asset advancement in past, and with the initial wave of mainstream adoption over, the sentiment is following: less volatility the better. 

There is every chance that the advancement of Stablecoins will be rapid as an alternative to traditional cryptocurrencies but not really their replacement.

 

About Crypterium

Crypterium is one of the most promising fintech companies, according to KPMG and H2Ventures. We are building a mobile app that meets the banking needs of the digital assets era.

Our goal is clear: with Crypterium, whatever you can do with traditional money you will able to do with digital assets. This idea is supported, among others, by the co-founder of TechCrunch Keith Teare and over 400,000 registered users, and the number is growing by day.

The team is led by former General Manager of Visa Central & Eastern Europe Steven Parker, and C-level executives from global financial institutions, like Renaissance Insurance, London Derivatives Exchange, American Express etc.

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