The Rise of Stablecoins: Less Fun Cryptocurrency, More Viable Money
Cryptocurrency, Tether (USDT), Stablecoins–Earlier in the week EWN reported on comments by long-time Bitcoin bull and overall cryptocurrency proponent Mike Novogratz, when he expressed interest in the future of stablecoins as a viable source of digital asset. While his comments also came with criticism for the most recognizable stablecoin and eighth largest cryptocurrency by market capitalization, Tether USDT, his negative assessment was over the poor PR work done by the company as opposed to any failure of the technology.
Stablecoins, a class of blockchain-backed cryptocurrencies which operate by pegging their value to an extrinsic and identifiable source, have become vogue in the second half of 2018. Where companies and startups were flocking to the ERC-20 token model for ICOs in 2017 and the first part of this year, the stablecoin model is becoming an increasingly attractive proposition, particularly for investors exhausted from the ongoing bear cycle. Compared to the price volatility of traditional cryptocurrencies, which exhibit a large amount of fluctuation for even intra-day valuation, stablecoins provide an extent of stability to investors and merchants looking to participate in the new form of digital asset.
The exact model for pegging the value of a stablecoin is still variable at this point, and will likely be explored further as the industry matures. For now, the U.S. dollar and precious metals such as gold have become attractive options for most stablecoins, with the idea being that greenbacks and rare metals are unlikely to undergo rapid price movements. The end result is the creation of a product that combines some of the strengths of cryptocurrency (security through blockchain, fully digital assets, mobile wallets, etc.) while buffering against the downside of extreme price volatility and fluctuating valuation on a near-hourly basis.
Investors and holders of stablecoins are given the most assurance over their digital asset, albeit at the cost of missing out on appreciative gains. Even Tether’s USDT, which is currently experiencing a trend away from its historic $1 valuation, is barely down 2 cents–a minuscule amount given the 90+ percent losses most of the altcoin market has experienced from hitting an all time high in January.
However, even as stablecoins provide an exceedingly viable product for digital and crypto-based transactions, questions remain surrounding the level of decentralization for such coins in addition to their ability to retain value despite the so-called tethering effect. While the projects can remain decentralized in terms of open-source development and distribution across the investment base, there is no doubt a quality of centralization in the act of tethering a coin’s value to that of government fiat. For some, one of the most attractive aspects of cryptocurrency is to possess digital money that it is free from the influence of bureaucratic institutions.
Stablecoins, even those who look to precious metals for their valuation, are at the mercy of external forces that may do more than just bring about price fluctuation. In addition, at least one economist has pointed out the significant difference between proposing a pegged value for a token, and the market actually implementing that value. In the case of Tether’s USDT, the market could decide the currency is worth more or less regardless of what the company decides to back the coin with. In addition, governments may seek to stamp out the currently unregulated tethering of certain stablecoins to fiat, in order to avoid providing a work around alternative to the price-stable benefits of their tender.