Blockchain technology is becoming more and more common in the traditional finance market with stablecoins and CBDCs — could these bring stability for the crypto industry?
Stablecoins have become widely popular in the digital currency industry because they don’t have the volatility associated with other cryptos like Bitcoin (BTC) for instance. Despite their popularity, the first wave of crypto assets — of which Bitcoin is the most popular — is failing as a reliable means of payment or store of value in several ways. They are susceptible to complicated user interfaces, highly volatile prices, issues in governance and regulation, and limits to scalability, among other challenges. Thus, instead of serving as a means of payment, cryptocurrencies in the past have often served as a highly speculative asset.
Related: Stablecoins, Explained
In response, the emerging stablecoins offer the features of conventional crypto assets, while linking the coin’s value to a real-world asset or pool of assets, thereby stabilizing its price. This stabilizing mechanism at the core of this initiative determines whether the units issued can effectively maintain a stable value or not. What is a working stablecoins definition? Per the Bank for International Settlements:
“Stablecoins, which have many of the features of earlier cryptocurrencies but seek to stabilize the price of the ‘coin’ by linking its value to that of a pool of assets, have the potential to contribute to the development of more efficient global payment arrangements.”
Needless to say, since the stablecoin price is more or less stable, it has become increasingly important in the digital currency space. Days before the entire world went into full lockdown, stablecoins and CBDCs, their government-backed sibling, were a hot topic that we have discussed at length.
In this article, I outline some of the crucial aspects of this new promise, beginning with a comprehensive list of stablecoins. Also, I look at how the industry’s giants are competing to make the best of the opportunity.
And, as per my new collaboration series of articles, I reached out to some industry leaders to get their thoughts (consensus), which I included below.
A list of stablecoins
What are the best stablecoins? The most common ones are fiat or asset-backed where the stablecoins serve as a digital representation for a specific asset — say, one coin equals one United States dollar. A second type is known as crypto collateralized stablecoins. Here, several distinct cryptocurrencies, put together in one group, act as a collateral for an issued stablecoin. Then, there are algorithmic stablecoins that eliminate the need for economic markets — a digital authority is created to stabilize the on-chain currency. To simplify, let’s look at an example from each category.
Tether stablecoins (asset-backed)
Endowed with a significant first-mover advantage, stablecoins are among the first crypto assets to surface. Issued by Tether Limited, it operates on the Omni protocol as a token issued on the blockchain. Not only is it backed by the U.S. dollar (USDT) but Tether is also pegged to the euro (EURT) due to the control wielded by the European Union. Additionally, it has launched a Chinese yuan-backed stablecoin (CHNT).
Tether crypto dominates the stablecoin market in terms of market capitalization and trading volume. In February 2019, it accounted for almost 90% of the entire market capitalization of stablecoins. While the market has been witnessing stiff competition, Tether’s quasi-monopoly remains unchallenged with its trading volumes hovering around 95% of the overall stablecoins market and the tether crypto price — which is pretty impressive. It also happens to be the largest tokenized stablecoin, with an average daily volume of $40,337,665,581 and a capitalization of $4,633,935,920, according to stablecoin CoinMarketCap.
MakerDAO stablecoins (crypto-collateralized)
Even if a fully trustworthy audit was realized, any kind of regulatory issue is likely to jeopardize the convertibility of Tether. There are plenty of stable digital currencies available, but only one can claim to be widely used, decentralized and trustless — MakerDAO. The MakerDAO CDP portal is responsible for the generation of Dai (DAI), Maker’s in-house stablecoin. It offers an alternative that does not rely on existing models and, as a system, is largely analogous to a pawn shop loan. What is the MakerDAO price? It is backed by on-chain collateral, Ether (ETH), with a floating peg to one U.S. dollar.
The MakerDAO model leverages a dual token system comprising primarily of the stablecoins Dai and a secondary unit called Maker (MKR). Here, we’re looking at a Decentralized Autonomous Organization — that is, a decentralized organization represented by cryptographically encrypted “rules” controlled by all MKR holders on the network. They are responsible for carrying out various administrative tasks. As they are in charge of defining the risk parameters, they are also responsible for maintaining a stable Dai exchange rate.
NuBits stablecoins (algorithmic)
Building on Peercoin’s platform, NuBits (USNBT) has been operational since 2014 and is one of the oldest algorithmic stablecoins, with a peak capitalization of $674,584 and a daily volume of $13,176.59, according to CoinMarketCap. Although it recovered remarkably from a major loss of confidence back in 2016 and was additionally able to withstand temporary price fluctuations, the value of NuBits coins failed to recover after a drop in March 2018.
Its stability mechanism largely relies on a dual token design. Share token holders can initiate the creation of new NuBits. However, the share tokens are not pegged to any specific price; they have a fixed supply; and they can be used to validate transactions. The contraction of the NuBits supply is incentivized through dynamic rewards for locking NuBits.
Coinbase vs. Binance — The race for stablecoins
Of all the companies operating in the crypto market, none have grown as significantly in terms of the crypto market cap as these behemoths that have exceeded Morris Katz in painting a new industry. There have also been multiple claims about Binance being the fastest profitable startup to achieve unicorn status — a private company valued over $1 billion. However, Binance is not the undisputed king — Coinbase saw similar explosive growth when the exchange reached a valuation of $8B from $483M in just one year. Coinbase charts are thus looking great.
Binance, though, has a complete monopoly over the market in terms of the trading volume. On Dec. 18, the 24-hour trading volume was $1,448,959,110 (it was approximately $241,458,067 across all trading pairs on the Coinbase Pro exchange although it has significantly increased). Moreover, Binance has a very low fee of just 0.05% per trade for its Binance Coin (BNB). Once you purchase Bitcoin, Litecoin (LTC) or Ether, you can use Binance to convert one of those into nearly any altcoin.
Although Binance has overtaken Coinbase in many ways, it barred American users from its global exchange thanks to regulatory reasons. However, they opened a smaller exchange called Binance.US to continue serving American customers after receiving approval from the New York State Department of Financial Services.
However, days later, Coinbase announced the establishment of the Crypto Rating Council, of which Coinbase and Kraken were two of the founding members, along with other predominantly U.S. firms (Binance was, as you may have guessed, excluded).
Circle’s entry into the stablecoins movement
Although it had emerged as a behemoth of the industry in 2018, Circle, by the end of 2019, had discontinued its payments app and sold Poloniex to an Asia-based consortium. Thereafter, its footprint continued to shrink. The company’s strategic roadmap for the year 2020 involved the sale of its over-the-counter trading desk to Kraken for global expansion.
Kraken, the cryptocurrency exchange based in San Francisco, has been pursuing its expansion spree for a while with the acquisition of product-specific firms. This vital sale will help Circle not just to focus solely on its stablecoins but also to reorganize resources, improve team agility, achieve a specialized product portfolio and lower complexity in operations.
According to Cryptobriefing, it will perhaps soon assume a leading role in the stablecoin project’s infrastructure.
Blockchain consensus with industry leaders
Here’s what other industry leaders feel about this important topic.
Andy Cheung, the founder of ACDX and the former COO of OKEx:
“Stablecoins seem to offer the best of both worlds: utilizing blockchain technology and offering stable value. Personally, I see it merely as a branch of cryptocurrency and is developed to cope with regulations. The most successful model is fiat-backed stablecoin, yet it failed to align with the vision of Bitcoin — to liberate money from banks and giants. That said, it plays a crucial role in the mass adoption of cryptocurrency and bridges the gap between crypto and fiat.”
Paul Veradittakit, partner of Pantera Capital:
“Pantera is an investor in both Maker and Circle. I believe that stablecoins are important for payments, decentralized finance and other applications, and it will be great to see how they evolve and gain adoption. At the end of the day, one way folks can go out to market is having the right relationships and use cases such as payments, Eco and Luna are both great examples of that.”
Vincent Molinari, the founder, CEO and host of Fintech.TV and Digital Asset Report, and the CEO of Molinari Media:
“As the evolution of finance and technology continue to intersect globally, cryptography will continue to deepen its role in global capital flows. The advent of stablecoins, with underlying pooled assets, will continue to be woven into payment systems. This will perhaps see its most significant near-term adoption in the global securities settlement processes. This will create efficiency and scale between global counterparties and meaningful cost savings will be achieved in the cost of carrying capital between transacting syndicates and consortiums as continuous linked settlement and netting will occur via top tier stable coin usage.”
What lies ahead as far as stablecoins are concerned?
The coming years will possibly witness the advent of the second generation of branded stablecoin projects that would include secondary market liquidity, loyalty program integration and branding opportunities. Moreover, now that we have the much-controversial Facebook’s Libra, we might expect stablecoins from other major brands with a large customer network like Delta and Amazon.
Further, the Bank of Canada governor mentioned stablecoins in his 2020 vision. It’s true that just like any other invention, stablecoins offer as many conundrums as they do potential benefits. Yet, it’ll be wise on the part of policymakers to envision far-sighted regulatory regimes that will serve to meet the challenge and usher in a less fluctuating future for the stablecoin cryptocurrency.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, you should conduct your own research when making a decision.