Stable Coin 101 - What, Where, Why And Plans For 2019

clicks | 13 days ago | Google AI sentiment -0.20 | comments: discuss | tags: cryptocurrency

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As 2019 begins and regulatory compliance is at the horizon, stable coins continue to garner attention. The volatility of cryptocurrencies largely precludes them from being used as day-to-day currencies, and adequately building applications on top of them require more stability than what is currently available.
This is where stable coins come in as cryptocurrencies that are stable when measured in fiat currencies or gold. They provide a price peg for goods and services, while retaining the properties of a medium of transfer and store of value - at least in the short-term.
However, it is worth noting that fiat currencies are also subject to their own fluctuations - including exchange rates and inflation, but those changes pale in comparison to the young cryptocurrency market, and are more prone to long-term effects than the short-term.
Stable coins come in a variety of shapes and sizes , from crypto-collateralized to fiat-collateralized and even non-collateralized. Fiat-collateralized is the prevailing option of choice for many, as it is the most familiar and stable design.
They are fully backed by a fiat currency, such as the USD or gold, as a proven store of value. Fiat-collateralized stablecoins are overseen by a central entity, with Tether being the most well-known fiat-collateralized stablecoin today.
Crypto-collateralized stablecoins remove the centralized nature of fiat-collateralized versions, but are pegged to unstable cryptocurrencies and require more nuance. Maker’s Dai is the prominent example of a crypto-collateralized stable coin but has its own limitations, particularly its lack of scalability .
Finally, non-collateralized stable coins rely on algorithmic contractions and expansions of the circulating supply to maintain a stable value without being backed by anything.
This is the most complicated method for launching a stable coin and is subject to several regulatory pressures. Basis - the $133 million stable coin project startup - was an example of a non-collateralized stablecoin but recently had to shut down citing the regulatory constraints facing their model.
Tether was the dominant stable coin in the cryptocurrency markets for an extended period, before extensively covered problems including reports of their inability to retain banking services, conflicting reports that the circulating Tether was not fully backed by USD, and analysis that the company was exiting surfaced.
Since then, numerous stable coins have flooded the cryptocurrency markets, with many of them directly backed by exchanges. Exchange-issued stable coins include Coinbase and Circle’s USDC and Gemini’s GUSD, both of which are fiat-collateralized.
Other fiat-collateralized stable coins available now include the Paxos Standard Token and TrustToken’s TrueUSD. Following the emergence of a new class of stablecoins, Tether’s market share has declined .
Stable coins also include gold-collateralized versions, such as GramGold , where one GramGold Coin is pegged to one ounce of gold bullion. They also provide regular audits of their gold reserves to remain transparent.
Transparency is important, as the numerous adverse reports covering Tether indicate. Hand in hand with increasing integration with regulatory institutions, transparency is the defining narrative of stable coins emerging today.
For instance, Gemini Dollar balances are examined monthly by BPM and have been audited by Trail of Bits, Inc. Moreover, Gemini Dollars are issued within the regulatory oversight of the New York State Department of Financial Services, creator of the controversial BitLicense.
Newly issued fiat-collateralized stable coins - like Gemini Dollars and Coinbase/Circle’s USDC - are explicitly designed to reduce counterparty risk and provide investors with better safeguards than Tether.
Having exchange-issued stable coins directly as trading pairs within a specific exchange, also gives users more assurances and easier access to transferring in and out of a stable token, even if their money is still held with a custodian.
Predicting anything in the cryptocurrency realm is nearly impossible. Especially considering that most of the stablecoins that have materialized recently are precisely that, very recent, there is no clear frontrunner in the stable coin scene right now that shows a unique ability to separate from the rest.
The concept of stable coins also has faced its fair share of criticism . Stable coins introduce more intermediaries and trust into a broader ecosystem, where one of the leading narratives is reducing the role that trusted intermediaries play.
Their future role as a means of payment - when fiat currencies already accomplish the same task - is unclear. Many cryptocurrency users are simply uncomfortable with the popular development of stable coins.
The much blessed transition towards a more regulatory compliant cryptocurrency market seems inevitable, however. Compliance laws are forcing well-known exchanges services to enact KYC policies , ...