Stablecoins are blockchain tokens designed to stay at one value via a peg to a real-world asset’s quantifiable and stable value. These tokens work by utilizing a smart contract that burns and issues tokens in response to market forces or user redemption.
Stablecoins offer a unique use case for the digital currencies. Oftentimes, a trader wants to escape exposure to the market without cashing out into fiat currency. Stablecoins allow for this. They’re flexible, combining new technology and old (traditional) economy assets to create a reliable financial product.
Radek Ostrowski from Wisent Capital says, “Cryptocurrency markets tend to be very volatile. This opens the door to many trading opportunities including automated bots but is not ideal for real-world usage like doing shopping or paying the bills. This is where stable coins come to the rescue. Not only there is no need to use the banks for fiat, but also they can serve as a base coin to realize the trade profits and allow for calculation of the future spending reliably.”
Flaws of stablecoins
There are significant flaws to consider when you look at some of the top stablecoins in the market. The most popular stablecoin token is Tether, ranked at 8th by market value on Coinmarketcap and is in heavy circulation. However, it also faces accusations of poor accountability and, as of now, Tether has not provided conclusive evidence that there is enough money in reserve to account for all the tokens they have issued.
Another issue with stablecoins is that many of them rely entirely on fiat currency to operate. Any token that is pegged to the American dollar, including Tether and others such as TrueUSD, rely on the dollar to set its value. If the dollar experiences a serious issue, these tokens could face a crisis.
Stablecoins are gaining popularity
Stablecoins need more than a connection to a simple asset to attract buyers—they need accountability. For people who already buy crypto, stablecoins are a safer investment in the bear market since in theory, they cannot sink below the market value of the assets they are connected to. For those who do not buy crypto, Stablecoins are an attractive point of entry for the same reason.
But the varying strength of these stablecoins is directly connected to the level of accountability the token maker has in connecting the value of the token to the commodity it is pegged to. Buyers who do not understand the traditional ways commodities are valued may miss the finer points of how the stablecoin stakes its reliable value. So a keen appreciation for old economy valuation is important in finding a reliable stablecoin.
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One example of a blockchain company trying to bridge the gap between new technology and old economy business standards is Novem, which ties the value of its currency directly to the market value of gold, and uses third-party auditing and secure storage facilities like any traditional purveyor of gold.
The bottom line—people trust stablecoins because they trust the commodities that they are backing and the organization who is holding the real-world value. And like any investment, that may mean learning a little about the commodity you are purchasing through crypto with a little bit of old economy savvy in your crypto portfolio.
In the near future, it will be interesting to see what happens with many of these tokens. A lot hinges on what happens to Tether, who have yet to provide definitive proof of their cash reserves. The way that story shakes out, as well as how other tokens fare like the Goldman Sachs-supported USD Coin, will have a big impact on the future of stablecoins.
Barring a disaster, it is likely that stablecoins will continue to thrive in the cryptocurrency economy. There will continue to be a utility for this kind of token for investors, merchants, and many others.
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