Stablecoins: The Best of Both Worlds?

In the past, we have witnessed Bitcoin gaining hundreds of dollars in a matter of minutes and also nose-diving at a similar pace. Not only Bitcoin, but there are many other cryptocurrencies whose prices peak and fall. Volatility is one of the biggest hurdles for the masses to integrate crypto into their daily life and it is hampering the dream of mass adoption. A few are aiming to address this with the introduction of stablecoins and they have had success to a certain extent.

In this post, ChangeHero will introduce you to the concept of stablecoins, their peculiarities and impact on the mass adoption.

Stablecoins

On any given day, crypto markets would experience an up to 10–20% increase or decrease and there are multiple factors contributing to this change. It is very inconvenient for the public to use volatile cryptocurrencies for everyday transactions as the price fluctuates every second.

Stablecoins are considerably new and resemble fiat currency that people use for spending every day. These digital currencies aim to minimize volatility and offer a fixed value irrespective of the factors affecting the crypto markets. In this regard, they are more like actual currency than regular cryptocurrencies.

As a means to stabilize the value, stablecoins are backed by a reserve asset. Also, stablecoins function as a safe haven for crypto investors to store their assets and not worry about the price swings. The underlying assets can be fiat currencies, commodities like precious metals or even other cryptocurrencies. Most widely used among those are stablecoins pegged to the U.S. Dollar.

Fiat-collateralized

Tether logo

Tether was the first stablecoin available to the users in 2015 which revolutionized crypto trading. It was built on the Omnichain protocol and pegged to the U.S. Dollar at a 1:1 ratio: 1 USDT token will always be equal to $1, theoretically.

In terms of the use case, it bridges the gap between othercryptocurrencies and fiat currenices along with providing stability, transparency and security. Most often, we see traders selling off their assets for USDT on crypto exchanges before withdrawing to protect their profits.

With a market cap of over $66 billion dollars, it is the third most valuable cryptocurrency by market capitalization at the moment. It is completely dominant in the stablecoins’ market and operates on various chains such as Ethereum, Tron, EOSIO and Liquid. Tether is well established in the market and integrated into all the top exchanges. Despite the wide usage, its centralized nature and the lack of transparency regarding the dollar-denominated currency reserve are often criticized.

TrueUSD is another popular fiat-collateralized stablecoin. It is the first ERC-20 token fully backed by U.S. Dollar which raised an impressive $20 million in 2018. The token stands out from the rest in terms of transparency and discloses the details of escrow accounts daily. Other popular stablecoins follow the same design and include Binance USD, Paxos Standard and USD Coin.

Crypto-collateralized

DAI logo

MakerDAO is another name often heard in the stablecoin market. The project is well-known for its off-beat approach to stabilizing the currency.

Unlike Tether, DAI is crypto collateralized and backed by ETH. It is one of the first stablecoins to be completely decentralized. Each DAI token will be equal to $1 and the platform uses CDP (Collateralized Debt Position) smart contracts to lend DAI to the users.

In late 2019, MakerDAO introduced multi-collateral DAI adding support to BAT. Other tokens have been added to the collateral basket as well. The single collateral coin was renamed to SAI while the new multi-collateral asset took the name DAI. Though the project is applauded for its autonomous and decentralized nature, its stability fees structure has always been a controversy.

Algorithmic

Thise kind of stablecoins attempts to maintain stability in the value of the cryptocurrency through algorithms. Basecoin is one such stablecoin pegged to the USD which was announced back in 2017. The stability of the price was planned to be maintained through a consensus mechanism in which the supply of the tokens is adjusted according to the exchange rate between the coin and its peg.

The approach is similar to the Central Banks and was criticized by many in the crypto community. Though the project gained a good amount of initial funding, later it went into exile and is nowhere to be seen in 2020.

Two years later, another algorithmic stablecoin became infamous for its rapid rise and spectacular fall. Yes, we are talking about Terra algorithmic stablecoins, and UST in particular. It was a rather successful arbitrage stablecoin but its design turned out to be vulnerable to a death spiral. We have covered it extensively in a series of articles on Medium, and highly encourage you to read them if you want to learn more info.

Best of both worlds? Not yet!

Stability, Scalability, Privacy and Decentralization are the ideal characteristics of a cryptocurrency. Stablecoins solve only the stability problem, but fall short in the rest, especially in the decentralization.

If we get into the thick of it, crypto investors use all these stablecoins as a stop-loss tool. Traders simply exchange their crypto to stablecoins in order to avoid the loss of profits due to volatility. In a nutshell, stablecoins are far from delivering the best of both worlds, at least for now.

Mass adoption would be possible only when an average person is able to use a cryptocurrency like digital money, but stablecoin usage is not seen often in such scenarios. This is mostly due to the lack of awareness of the existence and the benefits of stablecoins in public.

We have been hearing news about JP Morgan and IBM releasing their own stable cryptocurrencies. Moreover, the topic of stablecoins cannot be concluded without mentioning Facebook Libra’s hard times. Though these projects contradict the true nature of decentralization, they would fuel the awareness of stablecoins and ultimately lead to mass adoption.

On ChangeHero you can exchange USDT, USD Coin and True USD with all the popular cryptocurrencies at the best rates. You can instantly swap your crypto assets to stablecoins without any registration or logins. Do give it a shot!

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