Can stable coins make good on their promise of price stability necessary for mass adoption and everyday use?
Often considered the “Holy Grail” of cryptocurrency, stable coins promise to provide price stability in the highly volatile and unpredictable cryptocurrency markets. Stable coins are often touted as the gateway cryptocurrency to worldwide mass adoption (both by consumers and financial institutions).
At the core of the argument whether Bitcoin (or cryptocurrency in general) can be considered money is whether it is a store of value.
The last 10 years has clearly proven cryptocurrency is a medium of exchange. However, in order to fulfill the definition of money — it also needs to be a store of value.
For cryptocurrency to achieve everyday use, it needs to be a stable store of value and that’s exactly what stable coins are promising to the world.
Why are Stable Coins So Important?
Many argue that what is holding Bitcoin (and cryptocurrency as a whole) back from worldwide mass adoption is price volatility.
While speculators thrive off price volatility, it’s bad for the average Joe when they are trying to make everyday payments using a volatile currency. The public is used to a stable currency — that is their expectation (for most countries).
What is a Stable Coin?
A stable coin is any cryptocurrency which is pegged to a “stable asset”. A stable asset can be anything from gold, fiat currency or asset where the price can be ascertained and generally agreed upon.
How is the Price Determined?
From a traditional standpoint, stable coins are backed by a “reserve”. This reserve corresponds to the number of coins in circulation.
The reserve can consist of collateral from any asset where the price is generally agreed upon. This can include fiat currencies, another cryptocurrency or asset like gold or real estate.
In theory, the price of the coin is “stable” as the assets supporting it are known.
How are Stable Coins Issued?
In most cases, stablecoins are issued either by:
- Central Authority: Issues new coins in relation to the collateral provided. The greater the value of the collateral, the more coins issued to maintain the price (Tether). However, the downside is less transparency.
- DAO: Offer the opportunity for the fully decentralized and autonomous issuing of coins.
Currently, we see many stable coins use a combination of both DAO and central authority.
Stable Coins of Interest:
Although there are many stable coin projects to choose from, for this article I am only listing (IMHO) the Top 5 which show the most potential for success in this highly experimental real-world experiment where theoretical economics and real-world market pressures intersect.
Likely the most well known stable coin is Tether. It’s been in operation for the last few years and boasts a large market capitalization of over $2.7 billion.
Tether achieves it’s price stability in a very intuitive way — Direct pegging 1:1 with the US dollar.
Accordingly, for each and every USDT (Tether) in existence there is an equivalent US dollar counterpart that supports it; in theory.
Where Tether has it’s shortcomings, TrueCoin (TrueUSD) is looking to shine citing full transparency, regular financial auditing and legal commitment to exchange the token for USD.
Additionally, TrueCoin is looking to expand and embrace the Euro, Yen and possibly commodities such as gold and silver.
TrueCoin has a very promising future and taking the necessary steps to distinguish itself from its biggest rival.
Maker, is similar to Tether in that it stable relative to the US Dollar, however what makes it different is that it is completely backed by Ethereum. Their stable coin is called Dai, pegged at $1 USD.
The stability of the system is obtained by means of smart contracts.
According to the Maker model, users do not purchase Dai, rather they create it in exchange for Ether. Price stability is maintain by the system automatically auctioning its Ether to maintain the price.
Havven, marketed as a decentralized payment network for use for everyday purchases, this ambitious project has developed an autonomous approach for solving the volatility problem.
Havven uses a dual-token economy to provide price stability. The first coin, called Nomin is the coin that would be used for everyday use.
Basecoin offers a novel approach to stable coins. Although the project is still in its infancy, its showing a lot of potential. It’s backed by prominent investors and has received solid funding to help the vision become a reality ($133M private placement).
Basecoin is pegged to an index or asset and by constantly monitoring the value of the index/asset, the token supply is automatically adjusted to reflect a stable value.
The Current Market Landscape:
For now, stable coins are seen as highly experimental and ambitious initiatives. We have yet to see a long-term real-world implementation of the “perfect stable” coin. That’s not to say it’s not possible. Just we are not there yet.
Outlook for the Future:
Stable coins offer the most critical component for widespread cryptocurrency adoption — Price Stability. However, this market is still in its infancy and although there are a lot of promising projects underway, it’s still too early to identify a clear winner.
Are stable-value assets necessary? Given the high level of interest in “blockchain technology” coupled with disinterest in “Bitcoin the currency” that we see among so many in the mainstream world, perhaps the time is ripe for stable-currency or multi-currency systems to take over.
— Vitalik Buterin, Ethereum founder
The ideal stable coin is one which is able to automatically and successfully manage market pressures without price fluctuation. We have yet to see this in practice, but many of us secretly believe it’s possible and we are not that far from making it a reality.