Stablecoins are simultaneously very boring and extremely exciting. On one hand, stablecoins are designed to maintain value compared to their underlying currency, i.e. dollar, yen, euro, etc. Nearly everyone has a basic understanding of currency. Creating a blockchain equivalent designed to hold a steady price is not exciting. On the other hand, the creation of a stable currency recognized by governments with all the speed and flexibility of Bitcoin is an entirely different matter. Since the initial creation of Bitcoin and blockchain over ten years ago, the crypto industry has taken the first steps to revitalize the perceptively stagnant field of global finance. Stablecoins will undoubtedly play a substantial role in this new landscape, but the journey will be neither easy nor smooth.
For some basic background, let us define what a stablecoin is. As previously mentioned, stablecoins are digital assets designed to hold their value over time. A dollar-pegged digital asset like Tether should not fluctuate wildly like its volatile crypto counterparts, rather stay at $1.00. Stablecoins can be categorized into three basic classifications.
Cryptocurrencies backed by an equivalent amount of dollars, currency, or tangible assets. Users and holders of these coins retain confidence with the knowledge that an equivalent amount of value is stored in a vault or on a balance sheet. Tether is the most widely known asset-backed stablecoin, although an audit in 2019 revealed that only 74% of the total value was held in reserve. However, this did nothing to affect the long-term use of Tether for crypto users. Instead, its market cap has only grown. It is available on several blockchains, including Ethereum, EOS, Tron, and Solana.
Other examples are: USDC, TUSD
Crypto backed stablecoins
Stepping towards the more speculative side, there are crypto-backed stablecoins. This may seem like an oxymoron as cryptos are volatile. MakerDAO has managed to walk this tightrope by creating DAI, a dollar-pegged stablecoin that retains its value through a series of smart contracts that dynamically use lending and borrowing to maintain DAI’s value.
With over $2 billion in MakerDAO smart contracts, the community has embraced it as a valid store of value.
Algorithmic backed stablecoins
Stablecoins that hold value based on complex mathematics, or seigniorage stablecoins, are one of the final hurdles in the space. Instead of relying on assets of any kind, these algorithmic stablecoins instead rely on increasing/decreasing the token supply in conjunction with demand. Several attempts have been made to develop a token for this (Basis and Anchor) but they have not yet caught on. Projects currently using the idea of dynamic token supply are AMPL and Tower of Babel (TOB).
The resistance to volatility has made stablecoins the most widely traded asset in the world of cryptocurrency. LiveCoinWatch.com shows that Tether has the highest volume in the world. Crypto speculators regularly take profit in Tether to measure gains and losses. Its analogous nature to the dollar also makes it a preferred way to send payments both locally and abroad. Looking at the amount of volume USDT does on a daily basis, it becomes clear just how popular the idea of a stablecoin is.
Future of Stablecoins
It was only a matter of time before nations became aware of the potential of blockchain-based payment systems. Perhaps buoyed by the success of projects like Tether, world governments are now actively pushing forward with native alternatives.
Central Bank Digital Currencies, or CBDCs, are quickly becoming a reality. Since announcing its national blockchain initiative in 2019, China put its Digital Yuan on a fast track. It is also taking steps to ensure that the Digital Yuan has no foreign competitors. A recent article cited a new draft that would recognize the Digital Yuan as currency while banning any other yuan-backed crypto. Native payment systems like Alipay would still be allowed to operate. This “China Only” policy would strive to keep other cryptos out of the local financial system due to exclusive acceptance of its CBDC. If Paypal or anyone else wanted to create Yuan-backed crypto, it would likely be blocked or deemed illegal.
The wheels of Government regulation turn slowly, and always behind the wheels of technology. But some local governments, like Wyoming, are looking to the future to encourage and accelerate the speed of adoption of stablecoins and crypto as a whole. The Cowboy State already has 13 blockchain laws on the books, including digital property rights for cryptographic assets, creating a 3-year grace period from current regulations, and a state-chartered depository institution to provide basic business services for blockchain companies. The state government also exempts crypto-to-crypto transactions from money transmittance laws.
These regulations are due largely to the efforts of Caitlin Long, a 22-year wall street veteran and staunch supporter of blockchain. In her speech at University of Wyoming’s Arts and Sciences Honors Convention in 2018, Caitlin spoke at length on the importance of blockchain in financial markets. “It’s about decentralization — networks with no gatekeepers, networks based purely on voluntary consent, networks governed by the laws of math rather than the laws of man. I believe a big power shift away from centralized institutions has begun, and it makes me optimistic.”
Cypherpunks and Bitcoin maximalists may scoff at the idea of a third party handling their private keys, but this is to miss the larger picture. Institutions and enterprise-level clients will require full custodial services if they want to hold crypto for themselves or clients. For crypto to become mainstream it has to reach the largest possible audience. Disregarding corporate involvement is short-sighted and ultimately, self-defeating for the industry.
If China, or any other country, decides to only accept its native CBDC, then tokens will need to be converted before they can be used in-country. Similarly, if the US mirrors that decision and uses only native CBDCs, it could further create currency silos or “walled gardens” mimicking the landscape today. That is, US businesses only accept dollars today, they will likely only accept the US digital dollar in the future.
In a world with multiple stablecoins and CBDC standards, a universal clearinghouse or exchange will need to be established to convert these currencies. As the Ethereum network is unable to handle this number of transactions, alternatives will need to be explored. Lattice, from Constellation Labs, has the ability and bandwidth to handle the millions of daily transactions to fit this market. With its MVP due in Q4 of this year and a mainnet set to roll out in 2021, the Lattice team is quickly moving to position itself to not only operate as a DeFi exchange but to handle the inflow of a global audience. Looking at the importance of stablecoins and the impact across global markets, one could only say that the markets are very exciting indeed.
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Authored by Carlos Park
Carlos has been actively involved in cryptocurrencies since 2014 and since then has authored multiple articles and reviews, edited podcasts, and acted as an advisor for several projects related to blockchain technologies.
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Counterfeit Digital Yuan ALREADY — https://qz.com/1922648/there-are-already-counterfeit-wallets-of-chinas-digital-yuan/
Digital Yuan to be on Alipay, no conflict — https://thedailychain.com/digital-yuan-will-be-available-on-alipay-wechat-pay/