If you’ve been in the cryptocurrency industry long enough, we bet you have heard sarcastic remarks and criticism of crypto on multiple occasions. Cryptocurrency critics have long questioned the credibility of digital currencies due to the lack of physical backing and extreme volatility. Since no one can see the money, many would still call it irrelevant.
Ok, volatility is not for everyone. We all have a different risk appetite after all. Some users are enjoying the waves and are comfortable with volatility, which is not a bad thing for traders and investors. Yet there are many users that love crypto but would appreciate more stability.
To address the volatility issues which arguably holds back the adoption of cryptocurrencies, the concept of asset-backed cryptocurrencies has emerged.
What are stablecoins?
As the name implies, stablecoin is a cryptocurrency that is collateralized to the value of a stable underlying asset (fiat, gold, oil, real estate, etc.). They were intended to be used as everyday means of payment and storing crypto without worrying about price fluctuation since they are less volatile during the up and downs of the cryptocurrency market.
- Off-chain fiat-backed
They can be backed by fiat currency such as USD or EUR, gold, or other non-crypto assets, hold by a transparent and centralized third party. The trust in the custodian of the collateral asset is essential for the stability of the price of the token.
Fiat-backed cryptocurrencies can be traded on exchanges and are redeemable from the issuer. Digital tokens backed by fiat are the most popular ones. Their value is linked to one or more fiat currencies (most commonly the US dollar, also the Euro) in a fixed ratio. Tether was the first stablecoin on the market. The Tether is realized off-chain, through global banks or other regulated financial institutions, they work as depositaries of the currency backing the stablecoin.
The most popular fiat-based stablecoins are USDC, Tether, GeminiCoin, TrustToken.
The basic concept of gold-backed cryptocurrencies is attractive for sure. A digital token represents a specific value of gold. For example, one token X has a value that is equal to the value of one gram of gold. A trusted third party stores the gold that the token is linked to. The price of the gold-backed digital currency will at all times be equal to the current rate of gold. This means that even if a token fails to take off, it will still be valued at the current price of gold. On the other hand, if the token price goes up, its value can rise above that of gold.
Commodity baked: DGX, HelloGold, SendGold.
2. On-chain (blockchain based)
Tokens backed by other cryptocurrencies such as ETH. It is dependent on the stability of the cryptocurrency on the other side of the equation. The most popular ones are Huobi, Steem.
The most complicated and least populat type tokens that rely on the work of algorithms and smart contracts to maintain price stability, it requires continual network growth and investment to provide capital and support a falling currency value.
Since the beginning of 2017 more than 100 projects has announced the plans to issue a stablecoin, but not yet publicly launched. Since the beginning of 2017, 119 projects have been announced but not yet publicly launched. Here are some numbers that explain where stable coins market stands.
- 30% of the total number of announced tokens went live
- 70% are still either in development or closed
- 50% of all stablecoins are based on the Ethereum network
- 95% of stablecoins are asset-backed
USD-backed stablecoins are currently the most active on the market and have the lowest attrition. Tether alone has a volume about $21 billion per day, which is more than Bitcoin, Ethereum, Litecoin, and other top cryptocurrencies.
One of the most controversial stable coins is Facebook Libra, which still has to come to a deal with US government officials.
It is worth keeping an eye on this one if it goes live it has all chances to surpass others.