Are StableCoins Cryptocurrencies’ Savior or their Undertaker?

Hidden behind the howls and cheers that accompanied the wild cryptocurrencies roller-coaster ride of 2018, a quieter trend was steadily growing. The stablecoin steady growth in 2018 is impressive. From the 30 stablecoin projects, including 9 live ones at the beginning of 2018, 2019 opens with over 160 stablecoin projects, 28 of which are live. The combined stablecoin market cap grew from around US$1.5 bn to US$ 2.7bn in the same period. Another point to further consolidate the potential for stablecoins is the latest update of the Texas Department of Banking’s Supervisory Memorandum — 1037 (“Guidance”) indicating that stablecoins pegged to sovereign currency and offer redemption rights to holders are now considered as having ”monetary value.”

Both cryptocurrencies and stablecoins are based on blockchain technology. Yet, unlike cryptocurrencies’ utility tokens, the value of which is directly linked to the growth or decline in use of the token, a stablecoin value is pegged to a stable real-world asset, from commodities to currencies.Another significant difference between cryptocurrencies and stable coins is that any stablecoin value has to be backed by assets held in reserve by the stablecoin issuer. This means that stablecoins are centralized by definition, as there has to be a central authority in charge of holding the backing assets, supervising the assets management and providing the documentation for audits.

On the plus side, this gives stablecoins price stability sorely lacking in cryptocurrencies, which might do wonders in increasing the adoption rate and actual use of digital currencies based on blockchain technology. Yet, aside from this positive aspect, the emergence of stablecoins might herald a cardinal shift in the road to decentralization opened by Bitcoin 10 years ago.

A brief look at the difference in the profile of utility tokens creators and of stablecoins issuers highlights the fundamental imbalance between them in terms of sheer power.

Photo by Hitesh Choudhary on Unsplash

Whereas any garage geek could potentially create a cryptocurrency with little more than an Internet connection, a computer and a can-do attitude, a stablecoin issuer needs to ensure compliance with still blurred SEC regulations and find the initial capital to purchase the backing asset (and, even when well-funded and benefitting from excellent legal counselling as was the case for Basis, it does not guarantee that they will not have to close).

Major players are now entering the stablecoin scene. From official bodies, like Unicef France — that recently launched a donation channel in DAI — to corporate giants like Facebook, -that is rumored to be studying creating its own stablecoin to enable disintermediated P2P payments on WhatsApp, — to at least 15 countries interested in creating Central Bank Digital Currencies (CBDC), the massive resources at their disposal simply dwarf the competitive power of the typical garage geek.

Optimists from the decentralized camp view the potential advent of stablecoins as a positive evolution since it will introduce the use of blockchain based coins to the general public and thus enable decentralized cryptocurrencies to capitalize on the increased familiarity with the procedures surrounding their use. This will increase the actual use of decentralized cryptocurrencies and potentially pave the way for easy adoption of crypto-based Daapps by the general public and snuff out the current rumors that cryptocurrencies are just a speculation and scamming tool.

Among these optimists are Bancor’s head of marketing Anna Stone and COTI’s CRO Guy Klajman who debated the future of stablecoins at the ‘Stablecoins, The Future’ event in Tel Aviv on January 9th.

Stone’s optimism is based on the Bancor-powered community currency pilot in Kenya launched by local non-profit Grassroots Economics, that saw a 40% increase in local commerce among initial users within a month of adoption, and might be a powerful tool to eradicate poverty. Based on the use of targeted localized stablecoins to shore up local economies, this experiment seems to be very conclusive and might indeed achieve the goal of “banking the unbanked”, one of the stated goal of the promoters of decentralized blockchain supporters.

Klajman, on the other hand, is more confident in the combination of stablecoin and scalability that COTI developed, that enables processing 100 000 transactions per seconds, and is integrated with a payment system. Since the launch of the Trustchain protocol underlying COTI’s solutions only became live on Testnet on January 8, they have already signed 24 enterprises, financial institutions, and governments have already asked COTI to create their own branded payment and loyalty networks or stablecoin. COTI is one of the founding members of the Scalable Protocol Alliance that just opened on January 17.

Pessimists, on the other hand, fear that stablecoins will fill the blockchain space with permissioned Distributed Ledger Technology (DLT), leaving no room for decentralized DLTs to grow and burying Satoshi’s dream of a society truly managed by the people for the people through peer to peer direct interactions.

So, will stablecoins boost or sink the idealistic goals behind the initiators of the blockchain era? Only the time will tell…