What is the role of Stablecoins in the Cryptocurrency Market?

 

What are Stablecoins for

Cryptocurrency has been set out to be one of the biggest revolutions in finance and banking since its inception. However, despite the leaps forward in the technology and popularity, it has not yet reached the level that many feel it deserves.

One of the biggest barriers to achieving this is the lack of stability. However, there have been efforts to negate this and reduce the volatility of the market. One method, the introduction of Stablecoins, is one of the latest and most promising developments on this front. Often described as a bridge between the crypto and fiat currencies, these coins bring together the benefits of both systems.

Stablecoins are a rather new addition to the cryptocurrency market. Essentially, they are a cryptocurrency that has its value pegged to another, more stable asset. These assets can be another currency like the US dollar or a commodity such as gold. By pegging their value to these assets, the value of a Stablecoin becomes much less volatile and somewhat more predictable.

The Role of Stablecoins

The role of Stablecoins is clear. They provide stability, as the name suggests, in a rather volatile cryptocurrency market. While the likes of Bitcoin and Ethereum have been known to see large changes in value within a single day, Stablecoins are able to maintain a more steady value.

The aim is to provide a more modern approach to money. They offer the benefits of cryptocurrency, such as security and decentralization, together with the more stable value of traditional fiat currency. This has numerous benefits for the market.

Entrepreneurs in the blockchain space will greatly benefit, with these assets allowing for more effective future planning. The managing of capital to help get ideas off the ground and support growth will help this community substantially.

For the purposes of payment, Stablecoins are a much safer bet than other cryptocurrencies. They are significantly less likely to suddenly fluctuate in value, meaning that maintenance is minimal. For these reasons, at this point in time, they are the most viable cryptocurrencies for use as a form of payment.

Beyond just payments, having a more stable value will help to transition more traditional financial products onto the blockchain. Products such as loans will be able to utilize Stablecoins without the risk of sudden fluctuations. This is important for bringing a more widespread audience of everyday users into the cryptocurrency market, helping with its adoption.

For users looking into long-term holding, Stablecoins are the best bet. They play an important role as a trading pair, again thanks to remaining resistant to other changes in the market. Whether looking to store their crypto during a particularly volatile period or to exit the market, the stability they provide make them the best option. They also increase the liquidity of exchanges. For all parties involved, Stablecoins provide some benefit.

Types of Stablecoin

Stablecoins come in three different varieties, with a fourth type combining elements of the others. These are the general approaches that exist for a price-stable token strategy:

  • Fiat-collateralized
    This describes the use of fiat assets in reserves to collateralize tokens. This enables it to provide price stability by pegging token value to the value of the reserved fiat.
  • Crypto-collateralized
    For this approach, crypto assets in reserves are used to collateralize tokens for the purpose of providing price stability. The tokens are pegged to the value of those reserved crypto assets.
  • Algorithmic non-collateralized
    The algorithmic non-collateralized style uses software economic models as a way to provide price stability without the reliance on underlying collateralized assets.
  • Hybrid
    Hybrid style is simply a blend of the three other basic approaches. It takes elements from each as a means of stabilizing the price.

Each of these approaches has its own benefits and disadvantages, but share the underlying goal of linking a crypto token to a real-world asset.

Stablecoins on KuCoin

KuCoin is home to several different Stablecoins. Each offer slightly different uses. This helps to diversify the Stablecoin market and offer different value to users. There are 6 examples that are now listed on KuCoin.

Tether (USDT)

Perhaps the most famous of the group is Tether. It has the highest market cap and is ranked amongst the top cryptocurrencies by some measures. Currently, it is ranked 7th on Coinmarketcap.

For every unit of Tether that is issued and put into circulation, a backing of the corresponding fiat currency unit, in a one­-to-­one ratio, is held physically in a centralized deposit. This means that one Tether is worth one USD, maintaining a stable value.

At first, Tether will be issued on the Bitcoin blockchain through the use of the Omni Layer protocol, and so they will exist as a cryptocurrency token. Tether can be redeemed/exchanged for the underlying fiat currency or the equivalent value in Bitcoin at the time.

Whitepaper: https://tether.to/wp-content/uploads/2016/06/TetherWhitePaper.pdf

TrueUSD (TUSD)

TrueUSD was developed to bring the cryptocurrency market a trading instrument that can be used as a medium of exchange. It is one of the few Stablecoins that is exchange-independent. TrueUSD is currently ranked 26th on Coinmarketcap.

TrueUSD is a USD-backed ERC20 Stablecoin. The token can be redeemed 1-for-1 for US dollars. The U.S. Dollar is a stable currency that provides a solid foundation on which to peg the token. Holders can redeem the tokens for USD from the project’s escrow accounts.

The system is designed to be safe and secure, offering legal protection and regular attestations of the accounts. This is achieved through “tokenizing” US Dollars through the TrustToken platform, making them blockchain-compatible and easily tradable on cryptocurrency exchanges.

Whitepaper: N/A

USDCoin (USDC)

Founded by Circle and Coinbase, the aim of USDCoin is to provide the first fiat-collateralized approach to cryptocurrency. The project aims to ease the experience of providing fiat currencies to blockchain applications, achieved through the use of smart contracts. The token is currently ranked 27th on Coinmarketcap.

One unit of USDC is backed by one unit of reserved fiat. With the focus on providing a functional fiat-collateralized approach to cryptocurrency, the project has made sure to thoroughly meet the requirements this entails. This includes meeting regulatory standards, having auditable reserve capability for traditional backing assets, and most importantly, maintaining a stable value.

To address and offset the centralization tradeoff experienced by Stablecoins, the project looks to build a network consisting of multiple token-issuing members, which can provide a wider variety of reserves and liquidity sources.

Whitepaper: https://www.centre.io/pdfs/centre-whitepaper.pdf

Paxos Standard Token (PAX)

Paxos Standard Token, or PAX, entered the cryptocurrency market looking to bring a Stablecoin that can be trusted. It looks to build trust based on its governing principles and backing from established leaders in the finance space. It is currently ranked 44th on Coinmarketcap.

PAX is a token that is backed by USD at a rate of one PAX to one USD. It is designed to be stable, fast, and cheap to use, as well as exchange. Stability is maintained through monthly audited dedicated omnibus cash accounts at FDIC-insured U.S. banks. Auditing is performed by top-ranking firms, building the level of trust.

A variety of use cases both from the initial release and for the future have been planned, with the ultimate goal of building an ecosystem around the token. As development progresses and the cryptomarket matures, a larger number of applications will come into use.

Whitepaper: https://www.paxos.com/wp-content/uploads/2018/10/PAX-Whitepaper.pdf

Dai (DAI)

Maker’s DAI token is a Stablecoin that is backed in excess by collateral. This makes it particularly consistent in value and resistant to volatility. Its value is stable relative to the U.S. Dollar. It is currently ranked 55th on Coinmarketcap.

Price stability is maintained through several different mechanisms which consist of Collateralized Debt Positions (CDPs), autonomous feedback mechanisms, and incentivized external actors. Supply and Demand are also managed and utilized to keep the price stable. These offer resilience and contingency in the event of any significant deviation.

DAI is backed by ETH. This means that it is auditable, and so it is possible to see the amount of ETH for each DAI. Using a CDP smart contract, users can generate DAI by leveraging their Ethereum assets as collateral.

CDPs are a central part of the project. Anyone that holds collateral assets can utilize them to generate DAI through Maker’s unique smart contracts, known as CDPs. These hold the assets deposited by a user and allows them to generate DAI, while also accumulating debt.

The debt effectively locks the deposited collateral assets in the CDP, until it is later paid back with an equivalent amount of DAI, at which point the collateral can be withdrawn. DAI can be used the same way as other cryptocurrencies when generated.

Whitepaper: https://makerdao.com/whitepaper/Dai-Whitepaper-Dec17-en.pdf

sUSD (SUSD)

sUSD, formerly known as nUSD, is able to achieve stability through a more unique method, while tracking the U.S. Dollar and maintaining a similar value. Right now, it is ranked 1223rd on Coinmarketcap.

The sUSD, a ‘synthetic asset’ is backed by Synthetix’s own cryptocurrency, SNX. Holders of the SNX token are rewarded for providing the collateral and stability through fees generated by transactions. The DApp platform Mintr allows users to mint their own tokens using smart contracts.

The system only lets users access a fraction of the SNX value they put into the smart contract to fully ensure all of the assets are backed. This relationship between the SNX and sUSD tokens enables the project to maintain liquidity and overall stability.

Whitepaper: https://www.synthetix.io/uploads/synthetix_whitepaper.pdf

Conclusion

Stablecoins play an important role in the cryptocurrency market. They are continuing to appear, and are becoming more diverse. For exchanges like KuCoin, they offer a great way for their users to escape some of the volatility of the market.

While there are some KYC and AML requirements for holding and trading, their stable value makes them ideal for payment. This is important for helping the widespread adoption of cryptocurrency. Bringing together the best of the fiat and crypto worlds, Stablecoins appear to be an innovative, ideal cryptocurrency for the masses.


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References:

Austin, S. (2019, January 18) Will Stablecoins Solve Entrepreneurs' Biggest Problem? Retrieved from: https://www.entrepreneur.com/article/325843

Bekhazi, P. (2018, December 9). 2019 Will Be a Big Year for Stablecoins. Coindesk. Retrieved from https://www.coindesk.com/2019-will-be-a-big-year-for-stablecoins

Kuskowski, P. (2018, November 5)  Stablecoins: Why We Need to Bring Traditional Finance to Crypto. Retrieved from www.forbes.com/sites/pawelkuskowski/2018/11/05/stablecoins-why-we-need-to-bring-traditional-finance-to-crypto/#41470ed9440b

Kennelly, C.(2018, November 6) Understanding the Three Types of Stablecoins. Retrieved from https://coincentral.com/types-of-stablecoins/

Bibliography:

Ethereum Foundation (2017, November 26) Dai Stablecoin [Video file]. Retrieved from https://www.youtube.com/watch?v=L1erp9Gkesk

Manrique, S. (2019, February 8) What is DAI, and how does it work?. Retrieved from https://medium.com/mycrypto/what-is-dai-and-how-does-it-work-742d09ba25d6

Spain, M. (2018, January 19) MakerDAO and the Dai. Retrieved from https://blog.havven.io/makerdao-and-the-dai-f21a4d5571a1

Stability for the blockchain (n.d) Retrieved from https://makerdao.com/en/dai/