2020 may be widely touted as the year for DeFi, but the stablecoins hype has long been established in the crypto space.
At Coinhako we support USD-backed stablecoins such as USDT & USDC so that our Singaporean users can fund their accounts for USD trading with other cryptocurrencies.
In other regional markets that we serve, we offer trading for a wide range of stablecoins with local currencies for the local market.
What exactly are stable coins? How do they differ from other cryptocurrencies? Or what is the perceived value of these assets?
What are stable coins?
Stable coins are digital assets that are designed to have a constant value over time, as opposed to the volatility that typically occurs in cryptocurrency prices.
In order to achieve this stable value, stablecoins are "secured". This means that the total number of stablecoins in circulation is covered by assets held in reserve.
The stable values of stable coins were valuable to crypto traders during times of market volatility to hedge against potential losses and to hold profits at fiat value during bear markets while still being able to hold these digital tokens.
The main difference between stablecoins and other tokens is that stablecoins are intended as non-volatile assets and are secured by assets to protect investors.
The supply of stablecoins is also usually adjusted to market conditions, and most stablecoins are issued by companies – this even includes commercial banks that have fiat money in reserve, such as JP Morgan's JPM coin or FAANG companies such as Facebook, who are working on releasing their own digital currency called LIBRA.
Types of stable coins
There are many other ways that stable coins can be collateralized by physical assets. The purpose of all is to ensure price stability.
Different types of stablecoins / Photo credit: Medium
1. Fiat supported stablecoins
Most often, stablecoins are backed by fiat currencies such as the US dollar (USD), which values each token in dollars that are securely held by a central securities depository such as a bank.
2. Stallcoins based on raw materials
A stablecoin secured with raw materials works almost similarly to a stablecoin secured with fiat. The main difference is that there are some commodities such as gold, silver or even a kilogram of bananas on the market.
3. Stablecoins supported by cryptocurrency
Cryptocurrency backed stable coins have a certain cryptocurrency in a reserve fund to secure the coin. However, due to the volatility of the cryptocurrency, the price-earnings ratio (PEG ratio) is not 1: 1.
4th Unsecured stablecoins
Unsecured tokens are based on mechanically generated algorithms that can change the volume of supply in order to maintain the price of the token. They rely on smart contracts to sell tokens when the price drops below the limit or to deliver tokens to the market when the value goes up.
How did stablecoins come about?
Stablecoins were first issued in 2014. The first two on the scene were BitUSD and NuBits, which were backed by other cryptocurrencies instead of fiat assets.
The world's first stablecoin BitUSD was released on July 21, 2014. This was the product of two future leaders in the cryptocurrency industry, Dan Larimer (EOS) and Charles Hoskinson (Cardano).
In 2015 RealCoin was launched and became what is now known as Tether (USDT). Tether is based on the OMNI blockchain and has been a stable market leader for coins since 2015.
Still confused? Here's a video to summarize everything we've covered so far:
Are stablecoins regulated?
Despite being positioned as a "stable" asset class, stablecoins have a number of unique regulatory concerns.
Combining the Features of Various Financial Services – Stablecoins include features of payment systems, bank deposits, foreign exchange exchanges, commodities, and collective investment vehicles.
As a result, they harbor financial stability risks.
To combat illegal financial activities like money laundering, regulators in different countries may impose policies that require stable coin trading platforms to implement the know-your-customer guidelines.
Stablecoin Controversies and Concerns
Secured stablecoins carry the risk of undercapitalization if there is uncertainty as to whether the fiat reserves held to protect the value of the asset are sufficient.
Because secured stablecoin prices are tied to assets held in reserves, controversy arises when it becomes difficult to verify that these companies actually have adequate reserves.
This can happen when companies fail to disclose their banking relationships as this information is required in order to conduct verifications.
2. Price stability
Although stablecoins are marketed as a stable digital asset, past market movements have shown that stablecoins may not necessarily be immune to high market volatility.
When the crypto economy took a dip in October 2018, Tether fell below $ 1. In early March this year, Tether (USDT) fell to $ 0.96 during a period of high market volatility.
Are stable coins only issued by companies?
In 2020, the hype surrounding the digital currencies of the Central Bank (CBDC) also triggered.
These are digital currencies that are issued by regulators in different countries and are mainly linked to the value of the local currency.
Many countries have given us an insight into their CBDC projects since 2019. Here is a brief summary of what happened:
A tokenized Singapore Dollar (SGD)?
Even here in Singapore, our local financial regulator has reported on the development of a token version of the Singapore dollar (SGD) as part of the Ubin project – an initiative by the Singapore government to improve the financial ecosystem in Singapore using blockchain and distributed ledger technology (DLT).
China and the digital yuan
Shortly after Facebook announced its own digital currency, Libra, the People's Bank of China announced that it would be pushing the development of its own centralized digital currency.
The purpose of the digital yuan, according to the central bank's Digital Currency Research Institute, was to replace some banknotes and coins in circulation, as well as small transactions.
The Bank of France (Banque de France) launched a series of experiments in early 2020 to test their potential central bank digital currency (CBDC) for financial institutions. The aim was to increase the efficiency of the French financial system and increase confidence in the currency.The digital Euro pilot is setting France on the path to make greater use of blockchain technology.
According to French financial publication Les Echos, the Euro digital pilot was aimed at private actors in the financial sector and would not be used for retail purposes.
Is the US dollar used as a token by the US?
Plans for US dollar tokenization by the US Federal Reserve are already under discussion.
The proposed digital dollar project started in May 2020 and would enlist the help of Accenture to bring a digital US dollar to market in the United States of America. The Digital Dollar White Paper can be found here.
What's next in the stablecoin sector?
What does the future hold for stable coins?
While we cannot say for sure what the next milestone will be in the stablecoin world, it is likely that many exciting developments will dissolve in the years to come.
With the right legal framework, stablecoins offer great potential – not only with regard to trading in cryptocurrencies, but also to close the gaps for traditional payment systems worldwide.
This article originally appeared on Coinhako and is republished here with permission.