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The Current State of Stablecoins

by Olufisayo
The Current State of Stablecoins

Stablecoin is designed to efficiently function as a store of value and a medium of exchange, all the while maintaining stability in price. However, people wrongly assume that stablecoins can completely eliminate the volatility of crypto prices.

We need to understand that there is still a long way to go for mainstream adoption of cryptocurrencies. Compared to traditional financial markets, stablecoins need time to overcome the turbulence in their fiat values.

The Current State of Stablecoins

Purpose Of Stablecoins

The main goal of stablecoins is to stay price-stable and broaden the crypto market. Taking the assets from the traditional markets and bringing them to the cryptocurrency market will require time and innovations.

You can benefit from stablecoins in getting quicker loans in the traditional method. Similarly, your cryptocurrency transactions will become cheaper and faster. Using the transparent, decentralised apps and through creating smart contracts, stablecoins offer you anonymity.

       

There are many stablecoins like Tether and TrueUSD, which are pegged at the value of US dollar. Some are also pegged against other assets like other crypto coins, but the goal is to keep the crypto prices resistant to fluctuations.

Creation Of Stablecoins

Most stablecoins are created and managed through one of the following 3 models:

Fiat-collateraliteralized – These act as digital representation of fiat currencies. They are fiat-collateralized, which means the stablecoins share one-to-one relationship with the fiat currency at which it is pegged. So, while the price stays the same, for the circulation of the stablecoins, there must be a stock of fiat currencies in their banks. Scaling becomes an issue and external auditing is needed for the fiat supply to align with the supply of stablecoins. Here, it becomes a centralised system.

Crypto-collateralized – These are pegged at cryptocurrency values. Users can borrow stablecoins against the value of that particular cryptocurrency. Here everything is decentralised, but more vulnerable to high volatility in crypto prices than in fiat-backed.

Algorithmically controlled – This is not backed by traditional fiat currencies or crypto coins. Having no collateral gives an edge in terms of scalability. This newer model can be seen in case of Basis. The disadvantage is that having no backing means the user should place his trust on the algorithm controlled software and it will take time to fully integrate into the stablecoin market.

       

Current Situation Of Stablecoins

For stablecoins to be effective in the short-term, the factors like transaction fees, speed and security should work favorably. In the long-term, maintaining stable cryptocurrency values is important. The main goal is to act as a non-custodial wallet and a store of value.

Currently, there is a lack of balance between the two models- fiat-pegged and crypto-backed stablecoins. Fiat-pegged stablecoins are more centralized, but not so transparent. On the other hand, though transparent and decentralised, crypto-backed stablecoins are more susceptible to market forces and price changes.

Tether – It is one of the US dollar-backed stable coins, which is the most popular one currently. Even though it is criticised for the above mentioned reasons, it provides solutions in being a liquid and price-stable digital currency.

TrueUSD – This is an ERC-20 token US dollar-pegged stablecoin. It is seen as a better stablecoin as it offers more transparency. Though TrustToken, the company behind TrueUSD has no US dollars in reserve, it has escrow attestations from registered banks.

Basis – It is an algorithm backed, non-collateralized stablecoin, which is still in Beta phase. To maintain equilibrium price, the supply is contracted or expanded for restoring or decreasing it, respectively. It is very vulnerable to crashes in crypto markets.

       

MakerDao – It uses a complex technology that combines crypto-collateralized stablecoin and crypto-backed solution, but it is pegged at fiat currency. Dai stablecoin is pegged at 1:1 USD, but backed by Ethereum and uses smart contracts. Though it is decentralized and autonomous, it faces scalability issues as it uses ETH.

Conclusion

Stablecoins will see a lot of evolution in the coming future. With newer technology, they can become the middle ground that brings together traditional fiat banking and crypto markets.

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