Volatility has turned out to be one of the main characteristics of cryptocurrencies. It refers to the drastic and unprecedented fall and rises in the price of Bitcoin and other cryptocurrencies.
While volatility can provide much excitement when trading Bitcoin, we could also see it as a disadvantage. The volatile nature of the cryptocurrency market has caused people to both lose large amounts of money, and even the reason why people have made millions. As the cryptocurrency market experiences an increase in value and traders, more technological advancements are made to ensure that the market continues to grow. One of these technological advancements is the development of Stablecoins.
Most people view the development of Stablecoins as a necessary and significant event in the crypto economy. They were developed to solve the problem of price volatility which has plagued those who wish to participate in a less risky way. They work to reduce the risk that cryptocurrency owners face when holding crypto for long periods.
In basic terms, Stablecoins are a form of digital assets pegged to physical assets which are more stable in our economies such as US dollars or even gold. While most people have argued in favor of Stablecoins, others see them as a crutch to continue reliance on cash currencies, even though the primary goal for the development of cryptocurrency in the first place was to break away from these centralized money systems.
The main idea behind these Stablecoins is that merchants and other holders can have the benefits of global currency, while also being protected from massive drops in the price. At the same time, they encourage holders to spend their coins since they know that there would not be a significant change in the value.
There are three different ways these Stablecoins can work. One version uses a dollar-backed reserve, which has a dollar stored for every coin that is made available to the market. This system means that if there are 100,000 Stablecoins released into the market, there is at least $100,000 stored in reserve.
Another version uses crytpoassets, as well as a system of overcollaterlization and incentives to ensure the market prices the stablecoin at its intended value, such as US Dollars. Finally, there is a version that relies on the principles of economics and can maintain a stable value relative to its peg through algorithms that adjust overall supply relative to demand.
Although there is a layer of complexity for crypoasset and algorithmically backed Stablecoins, they have no risk of physical assets being moved or restricted. Because of this, some would agree that a genuinely successful Stablecoin based on algorithms and cryptoassets has a superior advantage over US Dollar reserve based Stablecoins.
Now that we have discussed the basics of StableCoins, we will take a look into two of the StableCoin platforms that are in use today.
This platform happens to be the leading Stablecoin platform in the world. Recently, this asset has faced controversy with some experts and traders blaming it for the sudden fall in the price of cryptocurrencies between December 2017 and January 2018. According to the developers, they have backed this cryptocurrency by US dollars, and each Tether coin that is made available on the crypto market has an equivalent of it in US dollars stored in a safe place. A lack of transparency, however, has caused people to question this claim openly, leading to one of the downside risks of a reserve based Stablecoin.
Dai is a Stablecoin for US dollars backed by cryptoassets on the Ethereum Network. This system is the most mature and proven Stablecoin not backed by actual USD. It is still young in its overall age, and some feel that there is still a large amount of risk associated with a project such as Dai because of a lack of longevity. With that said, Dai has been able to maintain its value within a few pennies of $1 before, during, and after the overall cryptocurrency downturn. If Dai can ultimately become a confirmed success at being a decentralized Stablecoin currency, this will provide a significant tailwind for the crypto economy overall.
Benefits Of Stablecoins
Some of the main advantages of Stablecoins include, but are not limited to:
- Spending: Stablecoins offer holders the opportunity to acquire and spend coins based on major world currencies, anywhere in the world. In turn, it gives merchants the chance to accept crypto payments without having to worry about the volatility of these digital currencies.
- Stable Environment: Financial institutions looking to serve cryptocurrencies have been faced with one major problem, having to trade in an unstable situation. The development of these Stablecoins seeks to offer institutions a stable environment for them to transact value without having to worry about losing their funds to market crashes.
- Global Participation: Imagine a world where no location, however remote, has to live through the mayhem of local economic collapse. Whether you live in war-torn Syria, Venezuela, or Florida, you have equal access to storing your value in a stable, first world currency. This advancement is one of the most exciting promises of the crypto economy.
Christopher Brown is the Co-Founder of Zabo.