With all the different kinds of digital currency on the market or being announced, it’s no wonder that many people aren’t sure what advantages each of them has or why they should be interested in relatively new tokens. This isn’t a surprise, given the technical specifications of some cryptocurrencies can be difficult to grasp without a thorough explanation and many are still only useful for smaller userbases. One new form of cryptocurrency that is showing promise is called Stablecoin.
A stablecoin can be defined as “a cryptocurrency that has price stable characteristics,” this is according to 1confirmation founder Nick Tomaino. In most cases, a stablecoin is measured against the USD, but some may eventually be held up against an index such as the CPI (consumer price index).
The need for coins which have stable characteristics is apparent as many cryptocurrencies often experience periods of volatility and that, combined with higher transaction fees means that many merchants are hesitant about accepting them as a form of payment. In fact, some companies have even dropped Bitcoin from their roster of accepted currencies. However, stablecoins offer more security and may resolve some of the issues that have hampered Bitcoin’s growth as a fiat.
In this kind of stablecoin, a single entity holds money as collateral and issues a token that is a representation of the money that entity holds. One issue with this form of stablecoin is that users have to trust the entity which serves as a central holding location for the fiat reserves. A benefit of this structure is the fact that prices remain stable, being immune to many adverse market conditions.
This is the simplest and most centralized example of stablecoins, and in this model, the coins are backed by cryptocurrency reserves. However, this can require over-collateralization, meaning that the rate of capital is enormous.
These cryptocurrencies are price stable and not backed by any collateral. Most of the current types utilize an algorithm which grows and shrinks the supply of the coin depending on its price. This is done in an effort to creating pressure on the price both upward and downward.
Given the issues which all forms of cryptocurrency face, stablecoins may offer a number of features that other cryptocurrencies find worth adopting or will add to maintain a competitive edge. It remains to be seen which cryptocurrency comes out ahead, and it may very well be a stablecoin, provided they can offer investors and everyday users the most steady value and return.
