Lately, stablecoins seem to have become one of the most popular cryptocurrency models. This may be because, despite the normally volatile (and currently depressed) value of other cryptocurrencies, stablecoins are designed to retain a stable value, usually because this value is pegged to a national currency, like the U.S. dollar.
It is natural that consumers and merchants would avoid payment instruments that are prone to high volatility and market instability, which is why they switched their focus to stablecoins. Tether’s USDT is probably the most popular example, but many more have emerged this year.
Why Are Stablecoins Useful?
Stable.Report, a site that monitors stablecoins and stable tokens, shows about 120 relevant projects that are currently live or still in development. More than 50 percent of the displayed stablecoin projects came out after 2017, which proves the incredible pace at which this sub-market expands. The craze around stablecoins is not in vain — they connect thousands of internet and blockchain ecosystems with traditional economies, streamlining payment processes through automation and ensuring transparency, scalability and liquidity.
“Satoshi had a revolutionary philosophy of what money could be and stable coins are carrying the torch forward for that vision,” Ryan Kim, founder and CEO of stablecoin project Xank, recently told Bloomberg. “Bitcoin has become a speculative game and it’s just too volatile to use for commerce.”
Stablecoins are used to smooth the high volatility and noise of regular cryptocurrencies. Besides, most of them tend to apply the know-your-customer (KYC) and anti-money laundering (AML) requirements that help merchants shape their businesses in a secure and legal way.
Types of Stablecoins
As of today, the top stablecoins are backed by the U.S. dollar with a one-to-one ratio. This is because the dollar enjoys the status of a “world reserve currency” and is the most traded fiat currency, accounting for about 87 percent of the foreign exchange market turnover, according to data from the Bank for International Settlements (BIS).
Backing stablecoins with U.S. dollars seems to help issuers reach a wide group of investors, but some projects choose to implement alternative approaches. One example, PlasmaPay, an Estonia-based firm, is currently working on a blockchain-oriented payment ecosystem to be fueled by plasma token, a stablecoin that acts similarly to the Special Drawing Right (SDR) basket of the International Monetary Fund (IMF).
PlasmaPay founder and CEO Ilia Maksimenka predicted in an interview that the plasma token, powered by a blockchain, will represent the most stable currency in the PlasmaPay ecosystem, which will also include around 30 fiat currencies and cryptocurrencies. It will rely on a price-formation algorithm that will consider all of the currencies within the network based on their trading volume, which will smooth the price and ensure the lowest possible volatility. The special thing about plasma token, Maksimenka said, is that it can mitigate the volatility risks of both cryptocurrencies and fiat currencies, which is not true for dollar-backed stablecoins.
Why Are Stablecoins the Future?
The hype around stablecoins continues, even amid the recent collapse of the entire crypto space.
“Stable coins are potentially the key to unlocking widespread adoption of cryptos,” Rafael Cosman, the co-founder of TrustToken, which issued TrueUSD, told Bloomberg.
However, while dollar-backed stablecoins successfully address the high volatility of cryptocurrencies, they share the same risks associated with the U.S. dollar itself.
Stablecoins might be a better option because they help users address the risks of both cryptocurrencies and fiat currencies. And stablecoins leverage decentralization while USD-backed tokens fail to do so given that they depend on a centralized currency.
Many believe these innovative stablecoin payment systems are highly scalable.
“Today, when it comes to payments, stablecoin payment systems can compete with Visa and MasterCard in terms of speed, which are the fastest payment systems,” Maksimenka said. “The current globalization and the development of e-commerce have [created] demand for a new approach of financial relationships between the parties, which would cut intermediaries and will reduce the need for old-school models.”
Stablecoins are certainly riding a wave at the moment, and they are on their way toward reshaping the e-commerce infrastructure, the invoice payment models, salary and rent payments, lending markets and wealth management — maybe the whole world.