What differentiates Stablecoins from Bitcoin and other cryptocurrencies?
2020 could generally be billed as the year for DeFi, but the hype for Stablecoins has long been established in the crypto space.
At Coinhako, we support USD backed Stablecoins like USDT and USDDC, so that our Singaporean users can fund their accounts for USD trading with other cryptocurrencies.
In the other regional markets we serve, we offer exchanges for a wide range of Stablecoins with local currencies for the local market.
So what exactly are stablecoins? How do they differ from other cryptocurrencies? Or what is the perceived value of these assets?
What are Stablecoins?
Stablecoins are digital assets designed to have constant value over time, unlike the volatility typically seen in cryptocurrency price.
To achieve this stable value, Stablecoins are “collateralized” – meaning that the total number of Stablecoins in circulation is backed by assets held in reserve.
Stable values of Stablecoins have been invaluable for crypto traders during times of market volatility to protect against potential losses and maintain profits in fiat value during bear markets, while still being able to hold onto these digital tokens. .
The main difference between stablecoins and other tokens is that stablecoins are meant to be non-volatile assets and are asset-backed to protect investors.
The supply of stablecoins is also usually tuned to adjust to market conditions, and most stablecoins are issued by businesses – this even includes commercial banks that have fiat currency as a reserve like JPM Coin. from JP Morgan or FAANG companies like Facebook which is striving to release its own digital currency known as LIBRA.
Types of stable coins
There are many other ways in which stablecoins can be secured by physical assets; The goal of all is to ensure price stability.
1. Decree stablecoins supported
Most often, stablecoins are backed by fiat currencies such as the United States dollar (USD), which values each token in dollars that are kept safe by a central depository like a bank.
2. Commodity backed stablecoins
A commodity backed stablecoin works almost the same as a fiat backed stablecoin. The main difference is that it is backed by certain commodities like gold, silver or even one kilogram of bananas.
3. Stable coins backed by cryptocurrencies
Cryptocurrency-backed stablecoins have a specific cryptocurrency in a reserve fund to support the coin. However, due to the volatility of the cryptocurrency, the price / earnings / growth ratio (PEG ratio) is not 1: 1.
4. Stable coins not guaranteed
Unsecured tokens rely on mechanically generated algorithms that are able to alter the supply volume to maintain the price of the token. They rely on smart contracts to sell tokens if the price falls below the peg or to deliver tokens to the market if the value rises.
How did Stablecoins come about?
The world’s first stable BitUSD was released on July 21, 2014. It was the product of two future leading figures in the cryptocurrency industry, Dan Larimer (EOS) and Charles Hoskinson (Cardano).
In 2015 RealCoin was introduced and has become what is now called Attached (USDT). Tether is built on the OMNI blockchain and has been a stable market leader since 2015.
Still confused? Here’s a video to help you wrap up everything we’ve covered so far:
Are Stablecoins Regulated?
Although positioned as a “stable” asset class, stable coins present a unique set of regulatory concerns.
Combining the characteristics of different financial services – stablecoins encompass the characteristics of payment systems, bank deposits, currency exchanges, commodities and collective investment vehicles.
As a result, they present risks to financial stability.
To combat illicit financial activities such as money laundering, regulators in various countries can impose guidelines requiring stable coin trading platforms to implement know-your-customer policies.
Controversies and Concerns About Stablecoin
Guaranteed stable coins present a risk of under-capitalization, when there is uncertainty as to the sufficiency of fiduciary reserves held to support the value of the asset.
Since the prices of guaranteed stablecoins are indexed to assets held in reserves, a controversy arises when it becomes difficult to verify whether these companies actually hold sufficient reserves.
This can happen when companies do not disclose their banking relationships, as this information is needed to perform checks.
2. Price stability
Although stablecoins are marketed as a stable digital asset, market movements in the past have revealed that stablecoins are not necessarily immune to high market volatility.
When the cryptocurrency plunged in October 2018, Tether fell below US $ 1. Earlier in March of this year, Tether (USDT) fell to US $ 0.96 during a period of high market volatility.
Are Stablecoins only issued by businesses?
2020 also saw the hype of Central Bank Digital Currencies (CBDCs).
These are digital currencies issued by regulators in different countries, primarily designed to be indexed to the value of the country’s local currency.
Many countries have given us a snapshot of their CBDC plans since 2019, and here’s a quick look at what’s going on:
A tokenized Singapore dollar (SGD)?
Even here in Singapore, our local financial regulator shared on developing a tokenized version of the Singapore dollar (SGD) as part of the Ubin project – a Singaporean government initiative to improve Singapore’s financial ecosystem using blockchain and distributed ledger (DLT) technology.
China and the digital yuan
A little after Facebook announced its own digital currency, Libra, the People’s Bank of China announced that it will accelerate the development of its own centralized digital currency.
According to statements by the Central Bank’s Digital Currency Research Institute, the Digital Yuan was intended to replace some banknotes and coins in circulation and for small-scale transactions.
The Banque de France (Banque de France) has launched a series of experiments to pilot its potential central bank digital currency (CBDC) for financial institutions in early 2020. Aiming to increase the efficiency of the French financial system and promote greater confidence in the currency, the pilot of the digital euro puts France on the path to becoming a greater adopter of blockchain technology.
According to the French financial publication The echoes, the digital euro pilot was intended for private actors in the financial sector and would not be used for retail purposes.
Will the US dollar be symbolized by the United States?
The plans for the tokenization of the US dollar by the US central bank are already well under discussion.
Proposal Digital dollar project was launched in May 2020 and would seek help from Accenture to launch a digital US dollar in the United States of America – you can read the White paper on the digital dollar here.
What’s next in the Stablecoin space?
What future for stablecoins?
While we cannot say for sure what the next big step in the world of stable currency will be, it is likely that many exciting developments will take place in the years to come.
With the right regulatory framework in place, stablecoins have great potential – not only in terms of cryptocurrency trading, but also in filling the gaps in traditional payment systems around the world.
This article was originally published on Coinhako and is republished here with permission.