Stablecoins have gained considerable traction in the second half of 2018 as a viable replacement for cryptocurrency. While companies and startups were focusing on the ERC-20 token model for ICOs in 2017, this year the attention has turned to the stablecoin model.
What are stablecoins?
Stablecoins are still blockchain-based cryptocurrencies. They have their values linked to a real-world asset, therefore avoiding price volatility issues and removing the concerns over severe fluctuations in value that are commonplace with regular cryptocurrencies. They provide a degree of stability to investors and merchants as a viable source of a digital asset.
There are two kinds of stablecoins: asset-backed and algorithmic. The former is backed by reserves of the currencies they are pegged to. The most popular asset-backed stablecoin is Tether, based on USD reserves. The latter is controlled by an algorithm, which uses software rules to match supply with demand.
A myriad of examples
An example is the USD Coin (USDC) released by the cryptocurrency finance firm Circle in September. The coin was developed with the help of the company’s affiliate consortium CENTRE – and the stablecoin is intended to ‘tokenize’ the US dollar so it can be transferred to public blockchains.
Circle is not alone in tethering a stablecoin to the US dollar. The blockchain startup Paxos also released a stablecoin in September with the regulatory backing of the state of New York. Paxos designed their coin with the goal of offering those investors who are already trading in cryptocurrencies “a digital alternative to cash.” Paxos is already a qualified custodian approved by the American Securities and Exchange Commission.
Coins are traded on ethereum’s ERC-20 standard network and can be sent between any two wallets on the network. Coins are destroyed upon redemption so that they retain their value, while coins still in circulation are backed by dollars already in the firm’s custody.
Typically, most stablecoins are pegged against the USD, but we have seen some initiatives to move over to a basket of currencies or to an index such as the CPI (consumer price index). Deployed on the Ethereum Blockchain, the Globcoin, a crypto platform that provides access to stable payment tokens have issued their first stable coin, GLX. It is linked a currency basket of the 15 largest national currencies and 5% Gold.
Also in September, the cryptocurrency firm Eidoo launched a gold-based stablecoin called Ekon. The coin is also an ERC-20 coin, but each token is backed by gold – the firm promises that each will maintain the value of 1 gram of gold 999.
A promising future for stablecoins
Stablecoins are an alternative for users that want to avoid the volatile price couple with transaction feeds. While some say they can potentially serve as the backbone of financial applications on the blockchain, others are skeptical of the role played by the central entity that holds the fiat reserves. There are allegations surrounding Tether, which puts into question the trust put into the third party. The context right now of cryptocurrencies’ prices fluctuation, ICOs scams and uncertain regulations, have called for a more transparent mechanism and many are opting for stablecoins.