When merchants started introducing bitcoin and similar digital currencies as one of their payment methods, they quickly encountered a significant problem: price volatility.
There were instances like a luxury item dealership, which used to accept bitcoins for their products but saw the value their Ferrari cars jump by almost 33% during a test run. The company, dubbed as The White Company, later joined the popular trend of launching a “stablecoin,” a hybrid of blockchain and fiat money, which promised to protect its balance sheets from subtle influences.
What is Stablecoin?
Rather than fluctuating on the whims of traders’ speculation, a stablecoin is a new blockchain-enabled breed that is characteristically pegged to stable real-world assets, from commodities to currencies. For instance, users can purchase one stablecoin for a dollar, and can also redeem it later for the same price, thus eliminating the notorious crypto price swings.
The stablecoin industry became popular in the wake of 2018’s crypto crash. The depression saw the market’s leading cryptocurrencies like Bitcoin and Ethereum losing 80-90% of their capitalization within a year. A majority of retail investors, who were holding these volatile crypto assets, decided to exchange them for stablecoins as a part of their risk management strategy. Once the volatility settled, traders were redeeming their stablecoins for digital currencies, as well as fiat currencies to exit the crypto market on minimized losses.
Stablecoins are not as exciting as speculative assets, mainly because their backers supply only the portion that they can back against a stable real-world asset. They are highly attractive tools when it comes to retaining the qualities of blockchain-enabled payment networks for, say, remittance, and hedging.
The institutional players have begun to realize the potential of stablecoins. As of November, the total investments made into the stablecoin space has touched $3 billion, per Stable Report, a crypto research group. It has led to the introduction of more than 120 stablecoin projects this year.
Winklevoss Twins, for instance, launched a stablecoin for their Gemini bitcoin exchange in September. Circle, a Goldman Sachs-backed crypto group, also partnered with a US bitcoin exchange Coinbase to launch a USD Coin.
Almost every new player in the stablecoin market is coming with their audit reports in hand, a record that verifies that the company that intends to issue its stablecoins has sufficient assets to back them. Some coin projects have even introduced features that allow them to freeze or delete coins to tackle money laundering acts.
Popular stablecoin project Tether, meanwhile, has garnered criticism for refusing to get its balance-sheets audited by an independent party. It has enabled a whole new competition to flourish in response, which includes more modern stablecoin projects like TrueUSD, Paxos, and Maker, in addition to Gemini Dollar and USD Coin (as discussed above).
As the regulatory watch improves and companies begin to take due diligence seriously, 2019 could prove to the year of stablecoins. Advocates believe that in the long term, almost all the traditional industries would want to integrate a stablecoin solution.
“Insurance, lending . . . these are some of the categories that could start to grow into the trillions,” Garrick Hileman, head of research at Blockchain crypto wallet company, told FT.
Social media giant Facebook has already announced that it would introduce a stablecoin to power p2p payments on its WhatsApp messenger.
Featured image from Shutterstock.
Last modified: March 4, 2021 3:16 PM