Experts believe that 2019 may continue one of the trends of the previous year and become another year of the stablecoins. The site collecting statistics on stablecoins, the Stable Report, has 89 similar projects, while the list of coins backed by gold is incomplete and includes only the most popular projects, while their number is constantly growing. Blockchain company’s researchers point out that stablecoins open up “multi-trillion-dollar opportunities” and “have the potential to grow into one of the largest, if not the largest kind of digital assets.”
Why a Crypto Dollar Should Not Be Backed by a Dollar
Many of these projects use direct pegs to the U.S. dollar. Among them are the recently launched Paxos Standard and USD Coin, as well as Gemini Dollar, TrueUSD, and Tether. Despite the success of these projects (in particular, thanks to the well-known “parents”—Gemini, Circle, and Coinbase), such stablecoins do not bear any advantages, except for the formal proximity to cryptocurrencies and the convenience of entering and exiting the market through them. They are centralized because their provisioning pool is in the hands of a single enterprise. In addition, having a direct relationship with the dollar, they are extremely subject to government control, which is most clearly demonstrated by the SEC-Tether race. So, according to Synthetix founder (formerly Havven) Kain Warwick, Tether hides its fiat reserves from everyone including the U.S. government not because they don’t exist, but because it is trying to stay in the gray legal territory for as long as possible, providing itself and its users with relative protection of financial information. Coinbase, which participated in the launch of USD Coin, also has its own history of relations with the regulator and has already become famous for giving out user data.
“How logical is it to link decentralized cryptos to fiat, thereby de facto abandoning the principle of decentralization? There is no logic in this since cryptocurrency clearly positioned itself not as a complement to fiat but as its substitute. It is clear that it will be easier for the digitized dollar to ‘run operations’ on a blockchain rather than use SWIFT. This is, however, a benefit for the U.S. Federal Reserve, for bankers, but not those for whom the Bitcoin white paper from Satoshi Nakamoto really was meant in the first place,” writes economist Vladislav Ginko.
In this context, the commentary by Charlie Lee from his recent interview is also interesting: “Will it [Bitcoin] eventually reach a million dollars? Who knows? I think if the U.S. dollar goes into inflation or even hyperinflation, of course, it is going to reach a million dollars, but that’s like a long time away, if it ever happens,” Lee said in a conversation with Vlad Costea.
Therefore, the global idea of an “ideal crypto dollar” is that it is more stable than the dollar itself. And this can be achieved through cryptocurrencies with a more complex architecture of an algorithmic central bank, which will provide much greater stability, independence, and decentralization. They are not backed by any currency and are not tied to fiat, and their stability is provided by an algorithm that determines the required reduction or increase in supply. Such projects use a system whereby a certain amount of reinforcing funds is retained in a smart contract, which guarantees the preservation of the price of the stablecoin. According to this scheme, for example, the Synthetix stablecoin project and the stablecoin developed by the Minter project work.
Where to Apply?
Medium of exchange, global currency
One of the most apparent advantages of stablecoins is the absence of volatility. This greatly enhances the convenience of cryptocurrency in several applications at once, and it is on this quality of stablecoins that those who believe that the distribution of stablecoins will make cryptocurrency every-day are pinning their hopes on.
“With the development of these assets, we can expect a new round of popularization of cryptocurrencies among merchants (online/offline sellers of goods and services), as payments in stablecoins will prevent sharp hikes in rates, which can lead to loss of profits in turnover,” as commented by Dmitry Lazarichev, co-founder and CEO of the Wirex crypto bank.
Investor Brian Colwell notes that stablecoins as a global medium of exchange will be especially important for economies that are in crisis and experiencing inflation, for example, for Argentina and Venezuela (Stable Report refers to the national cryptocurrency of Venezuela, the Petro).
As with other cryptocurrencies, the advantage of stablecoins over traditional banking systems is the reduction of the cost of transactions and the possibility of near-instant payments.
Achievements in this use case are demonstrated by the MakerDAO project, which in November 2018 entered into a partnership with the Latin American exchange Ripio. Stablecoin developed by MakerDAO, Dai, will enable cross-border transfers in South America while eliminating controls and delays.
Unit of Account
Blockchain company’s researchers highlight this niche. They note that distrust toward cryptocurrencies is formed due to the often mentioned lack of intrinsic value, in which Bitcoin and other cryptocurrencies are reproached. And although Bitcoin maximalists refer to the fact that fiat currencies also have no inherent value, the authors of the study note that binding to a “real” asset, such as the U.S. dollar or any national currency, will accelerate the adoption of cryptocurrency by businesses.
The understandability of secured stablecoins, or “cryptocurrency dollars,” according to Dmitry Lazarichev, will attract individuals as well, since “stablecoins… are closer to fiat currencies than Bitcoin and other cryptocurrencies.”
Decentralized Financial Services and Lending
As Brian Colwell notes, banks and other traditional providers of financial services act as intermediaries between owners of funds and borrowers, as they have a competitive advantage in gathering information and assessing risks when issuing a loan. At the same time, such a system is not insured against the irrational use of funds and a lack of funding.
The most vulnerable parties under such a system are small businesses that have difficulty in raising funds at the early stages since the priority in financing is given to large companies.
Stablecoins will allow small businesses to significantly reduce expenses, thus lowering the cost of the supply chain and international trade, as well as eliminate the fees charged by intermediaries while creating a high level of security. The MakerDAO partnership with the Tradeshift billing platform is aimed at ensuring the liquidity of small businesses. Dai can also improve the lending market in Argentina since the country has set prohibitive interest rates on personal loans.
ICOs and dApps
The possibility of using stablecoins during an ICO is brought up by the creator of the Terra stablecoin Do Kwon. This will eliminate the possibility of a significant reduction in the price of raised funds, as happened with many projects that conducted ICOs on Ethereum and did not spend the funds before it fell.
As the Blockchain researchers note, the stablecoins will also eliminate the problem of manipulation and speculation when users try to capitalize on the fluctuations of the new coin. And it will be beneficial, first of all, for the project itself, since its token will be able to perform its primary function more effectively, that is, be a utility token and a medium of exchange. “DApps are the channel through which stablecoins are likely to reach the masses in the foreseeable future,” as the researchers write.
In the insurance industry, it is especially important to have a reserve, and therefore, in this niche, stablecoins with an algorithmic central bank, which keep a certain amount of supporting funds in a smart contract, are incredibly relevant, which ensures that stablecoin prices are preserved.
Payments and Accounting in Organizations
Kwon gives an example of Alipay, a payment system within the retail giant Alibaba Group which “successfully managed to become a closed economy with internal and incoming cash flows significantly exceeding outgoing ones.” Based on this, Kwon assumes that in the future, it is possible to create organizations that will carry out all the processes—attracting funds, issuing salaries, and maintaining accounts—in stablecoins.
Value Preservation Instrument
In this scenario, Blockchain researchers describe a specific example of using stablecoins as a reserve that miners should have for one time or regular expenses (such as purchasing equipment or paying for electricity). The currency they earn during the mining process may not be suitable for these purposes due to price fluctuations, while the availability of a reserve in the form of liquid stablecoins will allow them not to depend so much on mining earnings.
This application scenario allows leveling the errors in assessing the success of the project, which can occur when evaluating performance based on a volatile currency. Stablecoins more accurately reflect the intrinsic value of the project.
The Blockchain researchers point out that most of today’s Bitcoin futures operators (including CME and Cboe) make payments on futures contracts in fiat, while the stablecoins will allow Bitcoin futures to be entirely transferred into the cryptocurrency sphere and make payments on futures in cryptocurrencies without resorting to the services of banks.
How Many More Years Of Stablecoins Are in Store?
How long it will take for projects to develop a viable architecture is unclear, and perhaps the future king of the stablecoins is not even born yet. Besides, the “big shots” in the world of stablecoins that have wealthy “parents” and a simple peg to the U.S. dollar are likely to be popular for a long time. But as the industry matures, projects and the audience will grow. And then, perhaps, the laurels will move from the popular “kids” to smaller, but potentially more significant projects.