Will Stablecoin ever become a reality?

By: Quoc Doc

With innovations and new ideas being developed for stablecoin, it seems that stablecoin is here to stay. However, being implemented or not lies in the hands of the users and government approval.

In the crypto community, figures such as Gabriel Cardona, senior developer of Bitcoin Cash, and the Winklevoss Twins, who are the founders of Gemini exchange and creators of a pegged USD stablecoin called Gemini dollar, have raised their opinions that stablecoin is one of the next big innovations in the cryptocurrency market. Yet despite this optimism, there have also been some drawbacks that imply stablecoin won’t have an easy transition in the near future. In fact, just months ago, the United States based stablecoin project, Basis, was shut down due to regulatory concerns and the SEC mandated that Basis return capital to investors, including Andreessen Horowitz and Bain Capital Ventures. The news along with suspicious activities associated with prominent stablecoin Tether USD, have created skepticism on  stablecoin’s future impact.

In general, a stablecoin is a type of digital currency that aims to limit the volatility in price of itself or its underlying cryptocurrencies by either posting some sort of collateral, pegging relative to a basket of assets and less volatile cryptocurrencies or attaining backing from a well-reputed institution or government-backed entity. For a brief overview, there are three types: pegged, collateralized, and algorithmic stablecoin.

  1. Pegged stablecoins are fully collateralized coins. They are controlled by a single operator who ensures that the reserve has the same exact value as the volume of digital currency being circulated in the market. Examples of Pegged stablecoin are Tether, which is backed 1:1 to the dollar, TrustToken and Paxos.
  2. Collateralized stablecoins are coins that are collateralized with a variety of cryptocurrencies such as Ethereum. Coins in this group that are widely known in the cryptocurrency space include MakerDai and Havven.
  3. Algorithmic stablecoins, unlike the two types above, aren’t backed by any crypto or fiat currencies. Rather they are governed by algorithm that ensures the digital currency to be stable in value. Basically, the platform algorithmically issues crypto-bonds in exchange for their coins and ensure that their crypto holders buy it back at a later time. Examples of these coins include the project mentioned above, Basis, and CarbonUSD.

Over the course of last year, stablecoins have gained high traction. The number of live stablecoins, available for purchase in the cryptocurrency market, grew from 9 to 28 coins by the end of the year while over 160 projects were initiated, and are in the process of development. Many believe that the stablecoin frenzy didn’t start until people started looking for alternatives to Tether, a USD backed cryptocurrency, after it broke its 1:1 peg in October last year. This event news reaffirmed earlier suspicions about the company’s reckless spending, improper planning, and insufficient funding, and prompted investors to find new stable coin projects to back. This has resulted in the decline of Tether’s market share from 98% to around 70%, as coins such as PAXOS, TUSD and USDC have started to gain adoption. Big companies such as Facebook and banks such as JP Morgan have also decided to venture into the space as well, despite their earlier explicit positions against cryptocurrencies. Central banks around the world have also started to develop their own stabilized digital currencies. According to a recent research by BIS, The Bank for International Settlement, 70% of central banks worldwide are currently conducting research regarding digital currency, and half of them have moved onto experiments and proof of concept work.

Yet despite the increased funding and development in the space, there has also been a wave of criticism  and skepticism towards the viability of stablecoin. In an article written by UC Berkeley Economics professor Barry Eichenberg, each stablecoin has its own major flaw. Pegged stablecoins, like Tether for example, require a certain amount of faith and trust to exchange a full U.S. government backed currency for a questionably backed coin that no one would be willing to trade, except for money launderers. Partially collateralized stablecoins run the risk of a “bank run,” where a large number of people exchange their collateralized stablecoins  for the deposited cryptocurrency in the midst of doubts. Algorithmic stablecoins on  the other hand may experience limited platform growth. In this case, when the crypto-bonds are being issued no one would buy them because their belief in the platforms has failed. Other critics, such as Preston Byrne who has written extensively on the matter share similar views.

The overall stablecoin market doesn’t seem to hold up to its true value of decentralization either. Currently in the market, pegged coins take up the most shares, especially those that are backed 1:1 to USD. The problem is that these projects are operated by an identity or a group of people and the decision is not decentralized for the holders of the tokens at all. This is even worse than placing trust is central banks where you know there are actual expertise involved in controlling the flow of your money. Nonetheless it is important to remember that stablecoin or cryptocurrency in general wasn’t created to open a different path for centralized currency governance. It was to pave ways for decentralization and the exploration of a peer to peer system. For more on this discussion, please read my article HERE.

Stablecoin is still in its nascent years of development. Even the blockchain space itself has not finished its stages of building infrastructure or finding the right framework to implement all applications, let alone stablecoin ( introduced five years ago). And although there are many doubts and criticisms toward stablecoin, they are mostly based on theories and won’t likely be true about the industry. With innovations and new ideas being developed for stablecoin, it seems that stablecoin is here to stay. However, being implemented or not lies in the hands of the users and government approval. When we compare the blockchain innovation between that of the U.S. and that of Switzerland, it is noticeable that the room for improvements of the technology differ quite significantly. The strict regulation in the US have thwarted the innovation of the technology. As seen through the example of Basis, no matter how innovative the project is and no matter how highly skilled the team are, without conforming to the law, no project would be able to continue operation. Switzerland on the other hand has opened itself to blockchain. Its crypto friendly regulatory framework has led to the fruition of projects such as Ethereum and Tezos. But with recent news about easing regulations and countries exploring the opportunities of adopting blockchain technology, we might, in the future, use stable coin for daily transactions.

Works Cited:

Chaparro, F. (2018, December 12). Stablecoin project Basis is shutting down and returning nearly all capital raised to investors. The Block. Retrieved from https://www.theblockcrypto.com/2018/12/12/stablecoin-project-basis-is-shutting-down-and-returning-the-majority-of-capital-raised-to-investors/

CementDAO. (2018). End of Year Review: Stablecoin Ecosystem [Data File]. Retrieved from https://medium.com/@CementDAO/end-of-year-review-stablecoin-ecosystem-ebfe3bb2927b

CoinCola. (2018). Stable Coins Market Review 2018 [Data File]. Retrieved from https://www.coincola.com/blog/stable-coins-market-review-2018/

Eichengreen, B. (2018,  September 11). Why ‘stable coins’ are no answer to bitcoin instability. The Guardian. Retrieved from https://www.theguardian.com/technology/2018/sep/11/stable-coins-bitcoin-cryptocurrencies-tether

Finder. (2019, January 3). What is a stablecoin?. Retrieved from https://www.finder.com/stablecoins

Horowitz, J. (2019, February 19). JPMorgan’s move into crypto puts the rest of the industry on notice. CNN. Retrieved from https://www.cnn.com/2019/02/19/business/jpmorgan-jpm-coin-banks-blockchain/index.html

O’Neal, S. (2018, December 28). From Blanket Ban to Its Own Stablecoin: How Facebook’s Relationship With Crypto Changed Over 2018. Cointelegraph. Retrieved from https://cointelegraph.com/news/from-blanket-ban-to-its-own-stablecoin-how-facebooks-relationship-with-crypto-changed-over-2018