2019 May be a Year of Stable Coins, Here Are Reasons Why
Stable coins, as controversial as they may be, shield investors from what cryptocurrency and digital assets are famous for: volatility. However, let’s not blow things out of proportion. Because of increasing adoption, today’s volatility is not as same as those of 2016 or 2017 for example. All the same, we cannot discount the rise of stable coins and their roles in this burgeoning space. Encouragingly, experts are aware of this and expect volatility to taper off in months and perhaps years to come. They strongly believe that volatility is not a design flaw.
So, right now you may be asking yourself why analysts are closely watching and monitoring the performance of this equalizer. Well, it’s easy. Unlike asset prices which tend to be all over the place, the price of a stable coin will always be the same. Most of these stable coins are tokens. For every coin in circulation, there is an equivalent fiat amount backing it. That is to say most are pegged to an asset and with regulatory involvement, the end user is safe.
Type of Stable Coins
Stable coins classification depends on what secures the token or the collateral. In that case, these are the main types:
Fiat as collateral: Example USDT, Paxos or Gemini.
In this arrangement, the coin issuer deposits fiat currency—USD, Euro or Yen—in a bank. After that, they issue out tokens against what they have in their bank account. Every coin in circulation should be 1:1 against their cash reserves. The problem with this arrangement is that there is limitation from a third party (banks), trusting a custodian and often times, there is heavy regulation.
Assets as Collateral: Example DiamCoin (DC)
As the name suggest, each stable coin in circulation has the backing of a single asset or a basket of assets. Theoretically, owners of these coins should exchange, at any point in time, their tokens for real life representation of underlying assets. These tangible assets may be Gold, Silver, Diamonds or even real estate. In our example, owners of DiamCoin (DC) can liquidate their coins for diamonds.
Crypto as Collateral: Example DAI or Haven
These coins are perfect in a crypto ecosystem. They are straightforward but their major drawback is volatility which cannot spare even the most liquid coin of all—Bitcoin. Stable coins backed by other high value coins on the chain.
Thanks to 2018 downturns, stable coin diversity is increasing and with it, market confidence is picking. We expect stable coin use to tame market volatility in the long haul and although there are many options out there, users appear to be gravitating towards fiat-backed versions as USDT—which is the most dominant although with opaque operations and to Gemini Dollar.