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New report says stablecoins may become ‘the new money’

A new report by cryptocurrency and blockchain advisor, George Samman, titled ‘The State of Stablecoins 2019,’ details the history of money and makes an argument for why stablecoins represent the natural evolution of where money will head next.

Stablecoins are cryptocurrencies that are meant to retain a stable value. The price stability of stablecoins can be achieved through the pegging against fiat currency, a basket of cryptocurrencies, or other assets like precious metals.

These new asset-backed tokens have the potential to become a multi-trillion dollar asset class and could be the answer to one of cryptocurrency’s most pressing issues: volatility.

As Samman explains in The State of Stablecoins 2019: Hype vs. Reality in the Race for Stable, Global, Digital Money: "Stablecoins create connections between the legacy world and the blockchain. Thus, the raison d’être of stablecoins is to mitigate and solve price volatility which has so pervasively characterized cryptocurrencies while attempting to retain other characteristics of bitcoin such as the free flow of capital and censorship resistance."

The different types of stablecoins

Currently, there are four types of stablecoins available in the market: fiat currency-backed, physical asset-backed, crypto asset-backed and non-collateralized stablecoins.

According to the report, the most common types of stablecoins are those pegged against fiat currency such as the USD. The most well-known stablecoin is USD-pegged Tether (USDT), which has a market capitalization of around $1.7 billion. Other notable USD-pegged coins include USD Coin (USDC), True USD (TUSD), and the Gemini Dollar (GUSD), which all rank in the top 50 of crypto assets by market cap.

Stablecoins can also be pegged against physical assets such as gold. An example of a popular gold-backed token would be the Digix Gold Token (DGX), which enables investors to buy digitized gold in the form of a token pegged to the price one gram of gold.

Then there are also crypto-collateralized stablecoins, which use crypto assets as debt collateral to smooth out price volatility. Maker’s Dai (DAI), for example, is a fully decentralized, asset-backed stablecoin that maintains its value through the use of smart contracts that respond to changes in market dynamics by buying and selling pooled cryptocurrencies such as ether (ETH) and DAI’s governance token Maker (MKR).

Finally, there are also non-collateralized stablecoins, also known as algorithmic stablecoins, that expand and reduce coin supply automatically to maintain their value at US$1. Examples of non-collateralized stablecoin projects would be Kowala and Ampleforth.

The challenges and risks of stablecoins

While stablecoins sound great on paper, they also come with a number of risks and drawbacks.

Fiat currency-backed stablecoins are subject to the repercussions of central bank monetary policy actions and, thus, negate the value-add of decentralized digital currencies. Moreover, to build trust, audits have to be conducted to prove that the digital coin is actually backed by fiat currency cash holdings. Also, the accounts holding the fiat collateral could be compromised by government actions.

Physical asset-backed stablecoins also require a high level of trust through audits to ensure assets are being held to back the coin. The risk of government intervention in centralized operations such as gold-backed coins is also a concern for these types of stablecoins.

Crypto-collateralized stablecoins have to deal with crypto asset volatility in their collateral management process, which – in extreme events – could lead to a failure of the coin to maintain its peg.

Finally, non-collateralized coins are built on new technical and financial concepts that are yet to stand the test of time. Moreover, they are more susceptible to market fluctuations and could lose their price stability in times of extreme market volatility.

Why stablecoins matter

Samman identifies in his report that "the biggest barriers to adoption of cryptocurrencies as a medium of exchange and as a store of value are price volatility from speculation and the lack of perceived advantages over traditional payment systems […]."

The main reason why bitcoin (BTC) has only reached mass adoption as an investment asset but not as a currency is that it is prone to extreme volatility. Businesses that do accept bitcoin as a payment method generally convert it immediately into fiat currency through a merchant payment service such as BitPay.

Rune Christensen, the founder of the stablecoin project MakerDAO, believes that "[Stablecoins] are the first step before you actually see anything else interesting happening. I would argue that the reason why the blockchain world is so vapor-wary […] is basically because you just cannot do business in an unstable environment."

If stablecoin projects manage to overcome their challenges and can build sufficient trust within both the cryptocurrency community and commercial industries, they could become a standard payment method on a global level. The benefits of low-cost, secure, borderless digital payments that anyone with an Internet connection can make has the potential to attract millions if not billions of users in the future.

Moreover, if algorithmic, non-collateralized stablecoins manage to stand the test of time, this could usher in a new era of money that is no longer dictated by governments and their central banks.

Samman concludes his report by saying: "Our current monetary system has resulted in a global level of price instability and inflation and cryptocurrencies may offer reprise from what for a long time has been a less than ideal status. Stablecoins offer an important evolutionary step in the growing fields of blockchain and cryptocurrency to tackle this challenge."

"Money being issued and created solely by governments will start to become tested as competitive currencies and money systems emerge which are designed to make money programmatically stable and usher in a new era of decentralized finance," he adds.

Click here to download a full copy of ‘The State Of Stablecoins 2019’


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