Аmit Joshi, HashPrix Co-Founder, reflects upon the current state of development in the universe of stablecoins:
To put it in simple words, a stablecoin is a cryptocurrency pegged to a stable asset such as gold or fiat currencies, making it less volatile as compared to utility tokens. Stablecoins came into existence to tame the high volatility in the crypto market with values of most cryptocurrencies by as much as 30% daily, which is not a great trust builder to anyone who is looking to invest in the token markets.
With stablecoins, this volatility was done away with by pegging the respective tokens to an underlying asset. It was either backed by fiat currency – USDT, USDC, etc. or backed by other crypto assets – DAI or was backed by programmed algorithm to keep the value from fluctuating beyond a certain point. Now the questions that instinctively come to mind are –
- Have they achieved their motive to reduce the volatility?
- Which stablecoin creating mechanism is the most bankable?
- How frequently are the details regarding underlying assets audited?
- How has the stablecoin introduction impacted the adoption of investment in tokens?
Let’s take up one question at a time.
The short answer is – Yes, fluctuations in the value of stablecoins is less than 1% both in the case of fiat collateralized and uncollateralized (algorithmically programmed) stablecoins but when backed by a crypto asset, the value of the stablecoin fluctuates as per the value of the underlying asset.
This leads us directly into the second question about which mechanism is the most bankable. For me, it’s a tough choice between the fiat collateralized and algorithmically programmed stablecoins; it varies as per the transparency with which the underlying asset or algorithm is available for audit to the public. In the case of USDT which though has a market capitalization greater than USD 4 billion – the whereabouts of the entirety of underlying fiat currency is not completely transparent yet it due to the sheer community size using tether, it is the top two traded cryptocurrency, by volume, on a daily basis.
As of now, there are no set timelines of when the underlying assets or the algorithms are audited – which is a concern for most users who put their money in stablecoins when the crypto market starts exhibits volatility. Articles from multiple sources mentioning that the volume of underlying assets don’t conform to the actual number of stablecoins does raise skepticism about the reliability of the specific stablecoin.
Moving ahead, due to the ambiguities in sharing the details of the underlying fiat assets by the issuing authority – which increases the dependence on either a bank or a custodian; the number of programmed stablecoins will surge in usage as the mechanism backing it conforms more closely to how regular currencies operate but in a decentralized and algorithmic way. To build the trust of the community to start using these types of stablecoins, the underlying algorithm has to be audited every quarter and the complex algorithmic process has to be explained in simpler terms to eradicate the skepticism in potential users.
Lastly, the impact of stablecoins has been quite high in increasing the adoption of tokens as a form of investment; it has even seen attraction from institutional investors as well as banking and non-banking financial institutions alike. There are more than 50 stablecoin projects being worked upon, with 23 of them being live with USDT being the most popular stablecoin in circulation. Majority of the stablecoins are backed by USD with Euro and commodities such as gold also being considered to be the underlying asset and Ethereum being the most popular blockchain platform to launch stablecoins. That may soon be given a tough competition with Wirex intending to launch 26 stablecoins on Stellar.
There are several technological hurdles that limit DLT (Distributed Ledger Technology) adoption in respect of payments systems which range from lack of scalability to consensus protocols offering only probabilistic finality and not the absolute finality required for payments. Then there are policy hurdles as well which have to be overcome for a mass scale adoption of stablecoins and in turn cryptocurrencies. I feel, the introduction of fiat-collateralized stablecoins has been helpful in breaking the ice for skeptical investors, with more than half the existing stablecoins being backed by fiat currencies, before algorithm backed decentralized stablecoins take center stage in the coming years.
Agreed, there are limitations and a long way to go before reduction in the volatility of the value of cryptocurrencies; but stablecoins are getting more and more people interested in moving towards token adoption as modes of payment with limited risk averseness. To keep this flow going, the stablecoin projects of the future have to be careful to be true to what blockchain stands for – security, tamper proof, transparent and decentralized.
Co-Founder, HashPrix | Co-Founder BlueOrion