Understanding The Role Of Stable Coins
Francesco Dell'Agata, October 31st, 2018
A stable coin is a type of Cryptocurrency that is pegged to another asset which is considered safer or more stable than the majority of the cryptocurrencies across the market, examples are the Euro, U.S. Dollar or Gold. The concept of stable coins is considered to be an interesting yet controversial one and in this post, we will explore why this is the case. For example, Tether (originally known as “Realcoin”) is the most popular stable coin and it was invented only in 2014. The value of 1 Tether is supposed to always be $1.00. Recently earlier this month, Tether (USDT) made headlines across the crypto world when it’s value briefly collapsed to $0.85 in 10 minutes and naturally, investors began to lose trust in Tether.
Traditional cryptocurrencies such as Bitcoin, Ethereum or Litecoin are subject to more market volatility than stable coins. In essence, stable coins are used as a hedge against the volatile price swings across the crypto markets, which can range from anywhere between the low single digits to triple digits on a daily basis. Another reason to make use of stable coins, is to allow investors to hold onto FIAT currencies (USD, GBP, Euro, etc.) in an exchange, without facing considerable risk. The biggest risk associated with storing cryptocurrencies or FIAT currencies on an exchange, is that if the exchange is hacked, all funds could potentially be lost – with no ability to receive a refund.
Tether has been under scrutiny recently due to a number of actions which were taken by both Tether Holdings Limited as well as Bitfinex (one of the largest exchanges in the world by volume) – who is believed to be directly linked with Tether due to the fact that both companies share similar management and owners. In fact, two episodes come to mind. The first one is about Bitfinex’s failure to carry out audits to ensure Tether’s reserves legitimacy. Numerous times throughout 2018, Tether has struggled to prove that the company’s cash reserves are healthy.
A second episode is linked to Tether’s significant token redemption, where the company will destroy 500m USDT from the Tether treasury wallet – this occurred days after the dollar-pegged cryptocurrency rapidly collapsed in value, only to then briefly recover. It has to date not fully recovered to its $1.00 price. Each time one of these episodes occur, investors simply lose trust.
Despite the attention that Tether has received, it is not the only stable coin initiative present in the crypto market. In fact, stable coins have been the highlight of the past month and there have been numerous interesting developments in this space in recent times. Coinbase and Circle have entered in a joint venture to boost adoption of stable coins in the cryptocurrency market. This is an extremely positive development, which will strengthen the entire crypto market. The “CENTRE Consortium” will establish standards for listing of FIAT digital currency equivalents – the first one being listed on Coinbase is USD Coin, which is pegged 1-to-1 with the U.S. Dollar. Both companies have said that they “share a common vision of an open global financial system build on crypto and blockchain infrastructure”.
In September 2018, another key development in the stable coins space took place. The Gemini Trust Company behind the crypto exchange Gemini – headed by the Cameron and Tyler Winklevoss, unveiled a regulated dollar-pegged stable coin called Gemini Dollar.
To conclude, stable coins development seems to be picking up towards the end of 2018 and surely, it will be interesting to see which other companies initiate an accelerated effort towards further tokenising FIAT-based traditional currencies – and turn them into digital crypto alternatives. One thing is certain – everyone in the crypto industry will benefit from increased adoption of regulated, fully audited and secure stable coins.