Stablecoins are the big winner even amid the recent bearish trend of the cryptocurrency market. This is because of their functionality combined with the lack of interest from speculators.
When Bitcoin was first released by the mysterious guy or group of people under the nickname Satoshi Nakamoto, supporters claimed that it would revolutionize several areas in the financial space, including payments. However, many things have changed since the 10,000 BTC pizza, with the oldest cryptocurrency becoming the main target of speculators. Hundreds of other virtual currencies came in, but most of them have been as highly volatile as Bitcoin.
It is natural that consumers and merchants would avoid payment instruments that are prone to high volatility and market instability, which is why they switched their focus to stablecoins — the blockchain-powered virtual coins that are backed by fiat currencies or commodities. Tether’s USDT is the most popular example, but 2018 brought more of them, especially amid controversies surrounding Tether.
Why Are Stablecoins Useful?
Stable.Report, a site that monitors stablecoins and stable tokens, shows about 120 relevant projects that are currently live or still in development. More than 50% of the displayed stablecoin projects came out after 2017, which proves the incredible pace at which this sub-market expands. The craze around stablecoins is not in vain — they connect thousands of internet and blockchain ecosystems with traditional economies, streamlining payment processes through automation and ensuring transparency, scalability, and liquidity.
Ryan Kim, founder and CEO of stablecoin project Xank, recently told Bloomberg:
“Satoshi had a revolutionary philosophy of what money could be and stable coins are carrying the torch forward for that vision. Bitcoin has become a speculative game and it’s just too volatile to use for commerce.”
Stablecoins are used to smooth the high volatility and noise of regular cryptocurrencies. Besides, most of them tend to apply the know-your-customer (KYC) and anti-money laundering (AML) requirements, which help merchants shape their business in a secure and legal manner.
Types of Stablecoins
As of today, the top stablecoins are backed by the US dollar with a 1:1 ratio. This is because the USD has the status of a world reserve currency and is the most traded fiat currency, accounting for about 87% of the Forex turnover,according to data provided by the Bank of International Settlements (BIS).
Source: Bank of International Settlements
While backing stablecoins with US dollars help issuers ensure a wider reach, some projects choose to implement alternative approaches. PlasmaPay, an Estonia-based firm, is currently working on a blockchain-oriented payment ecosystem to be fueled by Plasma, a stablecoin that acts similarly to the Special Drawing Rights (SDR) basket of the International Monetary Fund (IMF).
PlasmaPay founder and CEO Ilia Maksimenka revealed that Plasma, powered by blockchain, will represent the most stable currency in the PlasmaPay ecosystem, which will also include around 30 fiat currencies and cryptocurrencies. It will rely on a price-formation algorithm that will consider all the currencies within the network based on their trading volume, which will smooth the price and ensure lowest possible volatility. The special thing about Plasma is that it can mitigate the volatility risks of both cryptocurrencies and fiat currencies, with is not true about USD-backed stablecoins.
Plasma is currently in the testing phase and might be launched on a demo platform in January 2019.
The hype around stablecoins continues even amid the recent collapse of the entire crypto space, which, at some point, fell over 80% from the year-to-date peak.
Rafael Cosman, the man behind TrueUSD issuer, reportedly said:
“Stable coins are potentially the key to unlocking widespread adoption of cryptos.”
However, while USD-backed stablecoins successfully address the high volatility of cryptocurrencies, they share the same risks associated with the US dollar itself. In the long-term, the US dollar devalues because of persistent inflation while the currency war with the US, European Union, and China at the forefront is putting additional pressure on the fiat money.
An SDR-like stablecoin might be a better option because it helps users address the risks of both cryptocurrencies and fiat currencies. Also, SDR-like coins such as Plasma are sticking to the decentralized model while USD-backed tokens fail to do so given that they depend on a centralized currency.
Besides, these innovative stablecoin payment systems are scalable.
“Today, when it comes to payments, we can compete with VISA and MasterCard in terms of speed, which are the fastest payment systems,” Maksimenka revealed.
“We’re implementing our project because the current globalization and the development of e-commerce have demand for a new approach of financial relationships between the parties, which would cut intermediaries and will reduce the need for old-school models,” he added.
Stablecoins are a mega-trend today, and they are on their way towards reshaping the e-commerce infrastructure, the invoice payment models, salary and rent payments, lending markets, and wealth management among others.
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