Updated: Feb 11, 2019
Image by Juan Mezzy for Davinci Codes
I've heard the term stablecoin a couple of times, and I never took the time to do some research on it. Cryptocurrency has come a long way from the creation of bitcoin, since then we have also been introduced to altcoins, tokens, stablecoins and much more.
These stablecoins are very particular, as their name says it all “stable” they are allegedly stable crypto because they are backed up by an asset, fiat cash or other cryptos. According to Investopedia “Stablecoin refers to a new class of cryptocurrencies which offer price stability and/or are backed by reserve asset(s). In recent times, stablecoins have gained enough traction as they attempt to offer the best of both world’s – the instant processing and security of payments of cryptocurrencies”.
With cryptocurrency being so volatile it makes sense that sooner or later someone would think about creating a less volatile coin. Those who try cryptocurrency it's like taking a leap of faith especially with altcoins; these have drastic changes in the market. These changes in the market make it impossible at times to use crypto for everyday goods and services. Back in 2017 and early 2018, we would buy most airplane tickets with crypto, but then it dropped significantly, and it wasn’t worth it at the time. Many online sites believe these stable coins are the solution to this; customers won't be worried that they are overspending on something that was a lot more cheaper.
Some of the most common stable coins:
One of the most popular stable coin created by owners of crypto exchange Bitfinex is Tether; this coin is backed by USD. Let's not forget that Tether went through some drama back in 2018 with speculations of bitcoin price manipulation. On June 13, 2018, John M Griffin and Amin Shams from the University of Texas released a study that investigates whether Tether, a digital currency linked to the U.S. dollar, had influenced Bitcoin and other altcoin prices during their peaks. Curiously on the same day, Bitcoin hit its lowest rate in the past three months. The study was carried out by analyzing blockchain data, where they found that purchases made with Tether were timed following market downturns and the result of this noticeably increased Bitcoin prices. Finally concluding that Tether was being used to provide price support, thus manipulating the value of bitcoin. I believe one way or another this may have overshadowed this particular stablecoin, but mostly it is unfortunate to think crypto might have been tampered with.
I’ve also learned there are different types of stable coins; centralized IOU stablecoins, crypto-collateralized stablecoins, and non-collateralized stablecoins.
“Centralized IOU stablecoins are the most straightforward type of stablecoin. Simply, centralized IOU stablecoins are backed with fiat money or precious metals, such as the U.S. Dollar or other sovereign currencies.”
“Crypto-collateralized stablecoins are backed by digital assets on-chain. This type of stablecoin is collateralized with other cryptoassets, such as Ethereum or another token.”
“Non-collateralized stablecoins don’t use any reserve but include a working mechanism, like that of a central bank, to retain a stable price.” Example: “The dollar-pegged basecoin uses a consensus mechanism to increase or decrease the supply of tokens on need basis.”
I have read many are against stablecoin because the fact that they are backed up by fiat cash and assets like gold means that there are linked one way or another to their financial regulations and cryptos basis is for this not to occur. Although I agree with the latter, I believe on the web, you can find things for all types of people, and with crypto, it's the same. Why not make a stablecoin? For those who feel more comfortable using a stablecoin because it's less volatile, why not make one? There is a space for everything in crypto; hopefully, there won't be any more allegations of price manipulation linked to stablecoins.
Hope you enjoyed it, feel free to comment!