How are stable coins different from traditional cryptocurrencies? Well, unlike a regular cryptocurrency, whose value ebbs and flows according to market interest and just about any regulatory murmur, stable coins are usually pegged - on a one-to-one basis - to either a fiat currency or commodity (Gold, Silver, Oil, or what have you.). Stable coins offer significant inherent value as they represent ownership of an actual physical asset.
David Yernack, professor of finance at New York University stated, in a paper published back in 1013 that "for any currency to be useful to society, it should be able to function as a medium of exchange, a store of value and a unit of account." Though Prof Yernack was using these criteria to fire shots at Bitcoin's feasibility as an everyday currency, he had a point. Some cryptocurrencies can, to some degree be used as a medium of exchange, they tend to do poorly as stores of value or units of account as a result of their steep fluctuations. This creates a need for stablecoins.
“Unlike cryptocurrencies such as Bitcoin, which are highly volatile, stable coins provide people with the pragmatic, helpful benefits of a cryptocurrency, without having to worry about distressing price changes since they are grounded in the real world.”- Brigitte Luginbühl, CEO of SwissRealCoin
As previously stated, stablcoins and their almost fixed value offer a relatively safe cushion for the value of your crypto tokens should market suddenly veer off in the wrong direction. Price stability goes a long way towards promoting the mass adoption of cryptocurrency and is a fundamental requirement for the introduction of reliable blockchain based financial products like savings and loan services.
There are 3 types of stable coins available today the most popular being Fiat Collateralized stable coins. Ths type of coin pegs it's value on a 1:1 ratio with an existing fiat currency. It's basically an IOU system where for every token issued, an equal amount of fiat is stored by a central custodian. This means token holders can at any given point, trade their tokens for a corresponding amount of fiat. There can, therefore, only be a certain number of coins in circulation as there is really only so much fiat running around out there.
There are those who believe El Petrol is a scam. Members of Maduros government have even gone as far as declaring petro illegal. One Jorge Millan even called Petro a "forward sale of Venezuelan oil", an outright an attempt at fraud.
What we have here are crypto tokens back by crypto tokens. The idea behind crypto pegged tokens is to avoid the centralization of fiat backed tokens and somehow "achieve stability in a completely decentralized ecosystem". It goes without saying that pegging a crypto coin to an equally potentially volatile coin is like milking a snake.
To mitigate the risk, crypto collateralized coins are usually over-collateralized. The excess funds act as a buffer from market fluctuations. This means that, for a single stable coin you purchase, you drop two of the coin it's pegged to. Giving it a comfortable 200% collateralization to protect it from a drop in value. Crypto collateralized tokens are more decentralized and usually enjoy high liquidity but are unlikely to see day to day activities.
Non-Collateralized coins endeavor to mimic fiat currencies in that they don't have any asset-backed collateral. Instead, they achieve stability through a system called seigniorage shares. Conceived by founder and CEO of Clearmatics Technologies LTD, Robert Sams, the seigniorage process uses smart contracts programmed to act as an autonomous reserve bank. Increasing and decreasing the supply of funds according to keep token value as close as possible to the value of the asset it's pegged to.
Non-Collateralized tokens are probably the most likely type to be used for daily use. The downside is that current versions require continuous network growth for stability mechanisms to work. This makes them highly susceptible to market crashes and loss of user interest.
Stable coins are set to climb the ladder as some of the most in-demand crypto assets as the industry matures and more institutional participants enter the marketplace.”- Fran Strajnar, head of analysis firm, Brave New Coin.
Mr. Strajnar may be right as the US's fifth bank, Goldman Sachs recently announced a stable coin of their own. USDCoin or USDC, as you may have guessed, is a US Dollar backed stable coin that aims to address the various shortcomings of current stable coins. Transparency is one of them. USDC, an ERC20 token developed by Sachs' fintech startup Circle in collaboration with CENTRE, Bitmain, and others, will also operate within the regulatory framework set by US money transmission laws and "reinforced by established banking partners and auditors”.
Whether stable coins become the backbone of the coming digital economy remains to be seen. Right now, it's anyone's game. If they can get past current technical flaws and regulatory hurdles, stable coins could very well lead the charge in ushering in the decentralized economy.
