Bitcoin and the other cryptocurrencies might have revolutionized technology, transactions, and the world of finance at large. However, there have been a few major stumbling blocks that have hindered cryptocurrency from becoming mainstream.
One of the greatest stumbling blocks in the vast expanse of stumbling blocks is volatility. Even when it comes to some of the most prominent cryptocurrencies like bitcoin, the value does not stay stable. These fluctuations have been a major cause of worry for a lot of financial experts around the globe. Although cryptocurrency and technology like blockchain solve quite a lot of problems, it seems to fall flat in the first territory where the money is expected to matter – delivering tokenized value.
All major currencies across the planet are designed to represent a tangible material value. It is either a note, a promise, or a statement of debt issued by a central bank or some financial regulatory body. The greatest promise that money holds is in its value. If a person sells something and gets money in lieu of the sold commodity today, they can be assured that they can use that money to buy something that holds similar value tomorrow.
Cryptocurrencies, however, have not been quite promising when it comes to the stability of prices. One day, a bitcoin might be enough to buy a car, and the very next day, it might not be enough to buy a loaf of bread – although a bit exaggerated, financial experts will not deny the possibility of this happening.
Is there a best of both?
In all its instability and volatility, it cannot be denied that cryptocurrency did revolutionize a lot of things. It was not dependent on intermediaries for effecting transactions, and the transactions were almost immediate. The transaction fees were kept to a minimum, and there were no time restrictions or geographic barriers, and these two factors are essential when it comes to global trade.
Although a lot of governments and high-profile financial institutions recognized the utility and value of cryptocurrencies and technology like a blockchain, the volatility associated with the coins kept them away from taking the mainstream and accepting its legality. Just imagine the repercussions if someone sold their artwork for some cryptocurrency that is worth millions, and the very next day, the value falls!
In short, until now, cryptocurrencies have been functioning more like a trader’s bet on a casino rather than functioning as a proper payment instrument.
One of the attempts, and by far, the most effective and promising attempt made in the space of unifying cryptocurrency and traditional economic value is creating a crypto coin whose value is pegged to a real-world asset that does not fluctuate in prices. The asset can be either a Fiat currency or gold or oil. These coins are expected to be less volatile and consequently, more stable. Such clients have aptly been named stablecoins.
As the name implies, stablecoins are cryptocurrencies whose value is pegged to real-world assets or a basket of assets. This implies that the prices of these asset-backed stablecoins are not subject to certain fluctuations, and even if there is, just like Fiat currency, it is expected to be a bit smooth and in line with the price of the asset that the stablecoin is tied to.
As discussed in the previous section, a stablecoin brings a lot of advantages built to the traditional world of commerce and the crypto world. Cryptocurrency and its volatility have been passively hindering the acceptance of blockchain as a technology because of its connection with the highly unstable crypto market. Stablecoins will help in the adoption of blockchain.
The stability will also have government bodies looking at crypto as a reliable space. This would mean that asset-backed cryptocurrencies are quite likely to become mainstream modes of transaction in the near future.
Stablecoins are made available through stablecoin ICOs. This is a bit different from the usual way in which cryptocurrencies are made available. Unlike mining, stablecoins are launched by companies, announcing their dependability through the asset that is backing the coin.
A few examples of stablecoins
One of the first names that come to everyone’s minds when we talk about stablecoins is Tether. Commonly abbreviated USDT, the Tether, as the name implies, has its value ‘tethered’ to the United States dollar, making it a fiat-backed stablecoin. Currently, Tether is the market leader when it comes to the stablecoin market, and it holds a staggering 94% of the market share.
USDC is another stablecoin that has its value pegged to the United States dollar. It was developed by a company called a circle, and it is valued at about $630 million. What is interesting to note is that about a month ago, it was valued at about $200 million less. It is a sure and promising sign that the value and validity of stablecoins are growing with every passing day.
The authoritative supports
Stablecoins have prompted, or rather, intrigued the interests of governments to look at it as a digital alternative to fit currencies. The government of China has already embarked on a mission to develop central bank digital currency. Commonly abbreviated CBDC, these central bank currencies are offered as official alternatives to the official currencies of world nations.
China hasn’t been alone in this mission. Russia has also been considering a new central bank digital currency. On the same lines, the government of Japan, Singapore, Thailand, Sweden, and France have been considering the development of a CBDC. The European Central Bank (ECB) has been on the research concluding whether or not a digital currency would be dependable to be used as base money.
In the words of Orson the pig in George Orwell’s Animal Farm, all stablecoins are equal, but some are more equal than others! The stablecoin might have one concept as its underlying power, but the asset to which it is pegged to end on the same lines, the price stability of the asset is what determines the stability of the stablecoin.
The relevance of stablecoins
As everyone might have known, the COVID-19 crisis has not only affected lifestyle and health but even the economy. Stocks have seen an unprecedented plummeting, and unemployment is mounting to levels that almost reflect 1929-1930.
Today, the fiat currency has lost its dependability. Therefore, there is a need for a new form of payment but at the same time, it should not be too volatile. In the past 30 days, the bitcoin was valued at anywhere between $10,000 and $4500, making it extremely unreliable. Therefore, cryptocurrencies like bitcoin might not actually fill the space.
Given the circumstances, stablecoins seem to present the perfect solution to the situation. Most of the assets have not lost their value, and it only implies that if there is a stablecoin that has its value pegged to an asset, it might not fall in its prices or stability.
The relevance of stablecoins can be statistically understood and validated. The Tether is right now the fourth most popular cryptocurrency in the world. It jumped three places from the position it held in the middle of February this year – considering the dominance of big players and this movement can be considered a thing of paramount importance when it comes to establishing the relevance and dependability of stablecoins.
The USDC has jumped to the 17th place from its 30th, and the Paxos has moved to the 27th place from the 42nd. Almost all stablecoins have seen a move up and to the right during these times of crisis. A lot of cryptocurrencies that did not even see the light of the day has now made it to the top 50.
All these swings only go on to prove that an ecosystem with crypto technology and Fiat value is bound to be successful and dependable.
A possible global impact?
As everyone knows, the United States dollar is the de facto currency of transaction when it comes to international trade. Although some assets like oil are not majorly found in the United States, it is still traded in USD. This is in spite of the fact that none of the middle eastern countries use that currency. The price of oil is not subject to the uncertainties of the value of the country’s currency against the USD.
With China being ahead then western economies where it comes to the creation of a central bank-backed digital currency, it is quite likely that the new currency will replace the United States dollar as the mainstream mode of payment. Some economists have dubbed this transformation in the near future as de-dollarisation.
The big private names involved
Tether and USDC might be leaders in market shares, but it cannot be denied that another stablecoin which might not have even been launched is probably one of the most popular names in the world of stablecoins. We are talking about Libra.
Libra is an ambitious project by Facebook, and it might be even more ambitious than the social network that Facebook already is. It is designed to create a transaction ecosystem right within Facebook itself, making it not just a social network but a complete transaction and interaction medium. The value of the coin is not tied to a single asset but a series of multiple assets, including bank deposits and Government securities, and a few other assets that Facebook likes to call as ‘low volatility assets’.
Libra has been subject to a lot of criticism. Facebook has suspended the Libra project, but it cannot be denied that it played a major role in sparking global interest in stablecoins and crypto technologies.
Stablecoins do not paint a completely rosy picture. They present a series of disadvantages that could be detrimental to the growth and acceptance of stablecoins and crypto technologies.
The first and foremost threat to the blockchain ecosystem that stablecoins bring is centralization. Blockchain technology was designed to be decentralized with no single governing authority having the power to manipulate prices. However, with stablecoins, since the value is pegged to another asset, the change in the value of that as it would radically alter the price of the coin. Therefore, the concept of decentralization falls flat on its face.
Just like other cryptocurrencies, stablecoins have been facing their share of criticism. Tether, for example, has to fight a lawsuit filed against them alleging that they altered the price of the bitcoin.
Another major threat that stablecoins bring is its possible usage for illegal and criminal activities. Until now, even when it comes to the dark web market, bitcoin has been the defunct currency for trading drugs and weapons. The volatility of the currency is what made the trade a bit of a gamble. However, if stablecoins are introduced, drug dealers and illegal weapon dealers get the advantage of stability but at the same time, they are promised anonymity and faster transactions.
This is probably one of the most prominent territories that regulatory bodies are working on. The centralization is expected to curb the possibilities of fraudulent transactions and illegal activities but for all you know, it might only be playing in the territory of altering the value of the asset, and consequently, the stablecoin itself.
The future… Near and far
Until the last quarter of 2019, stablecoin was dismissed as yet another fanciful idea in the crypto world that might not find its relevance in the long run. It did not take more than three months to establish the supremacy and relevance of stablecoins, thanks, but no thanks to the COVID-19 crisis.
Today, all the governments and financial institutions have been looking at stablecoins like that long lost friend they forgot during the good times they had! 2020 is expected to be the year of stablecoins as crypto, in other spaces, has almost saturated itself. It will not be surprising to see a few governments come up with their own central bank digital currencies, and the Tether and ethereum dominate the crypto space. Bitcoin will probably lose its supremacy but not credibility.
No new technology has been completely right at its very start. It took Henry Ford to perfect the art of production line even though Daimler invented the motor car at least 3 1/2 decades ago. The same goes for anything starting right from aviation to information technology to mobile devices. The entire trip to space is now in its most nascent stage-it is just a little over a decade old.
The coronavirus crisis and the economic uncertainty have made this time a perfect juncture for a company to embark on the journey of stablecoin development. It not only positions you as a technology leader but also opens up an interesting business revenue that promises to be profitable and lucrative. If you would like to capitalize on times like this and create a crypto business, all you need to do is connect with a company like ours that has overall expertise in blockchain technology and specializes in stablecoin development.
Stablecoins can be seen as one of the most important confluences in the world of technology and traditional commerce. How governments, technology experts, blockchain gurus, and central banks handle the entire shaping of the landscape will determine if the future will be crypto-friendly or not!