Stablecoins are becoming the new darling in the crypto marketplace, especially as they seem to be more accepted in the mainstream. One of the main reasons why many people prefer it is because of its ability to resist the typical volatility of the cryptocurrency market. It is a relatively new concept, and it is one that is growing quickly.
In her recent speech, the President of the European Central Bank (ECB), Christine Lagarde acknowledged the fact that the emergence of a new asset class is upon us. In her speech, she made known the policy perspective of the ECB with regards to digital currencies.
My Personal conviction is that given the developments we are seeing, not so much in the Bitcoin segment, but in the stablecoins projects – and we only know of one at the moment, but there are others being explored and underway at the moment, we’d better be ahead of the curve if that happens, because there is clearly a demand out there that we have to respond to.
Watch again: Lagarde on digital currencies pic.twitter.com/L2HSjVZ2BD
— European Central Bank (@ecb) December 12, 2019
Stablecoins Are The Cure For Cryptocurrencies
CEO of InfractA, Daniel Essien believes that stablecoins offer some unique values to the digital assets industry that justify all the attention they are getting at the moment. He sees stablecoins as a solution to one of Bitcoin and cryptocurrencies’ major problem, the problem of volatility.
I like to say that if volatility is the curse of cryptocurrencies, then stablecoins are the cure. – Daniel Essien
Essien explains that stablecoins offer the all valuable qualities of convenience that cryptocurrencies give, and some more. He notes that there are four common types of backed stablecoins; marked by the method by which their stability is achieved. They are, fiat-collateralized stablecoins, commodity-collateralized stablecoins, crypto-collateralized stablecoins, and non-collateralized stablecoins.
In his opinion, the type that has the biggest chance of mainstream adoption is the fiat-collateralized stablecoin because it depends on traditional money (fiat). Hence, price stability is what stands stablecoins apart from other cryptocurrencies.
Stablecoins Are Creating A New Pathway For Cryptocurrencies
As the name implies, a stablecoin holds its exchange value against fiat over time. This price stability is important to the crypto ecosystem for a number of reasons. For day traders, a stablecoin gives a means of hiding away from the wild volatility that plagues cryptocurrencies.
For merchants or anyone who receives payment in a stablecoin, they can be sure that the value of that payment will remain at par with the paper currency with which the stablecoin is paired. For example, a stablecoin tied to the Naira will retain the purchasing power of the Naira.
This property gives Essien the belief that a stablecoin is quite valuable to existing players in the cryptocurrency space. But it also has the potential to be a pathway for new converts to adopt cryptocurrency. This is drawn from the fact that stablecoins, by retaining its value 1:1 with the base currency, behave much like traditional electronic money. This quality will give new entrants more confidence to join the crypto space.
A Naira-Backed Stablecoin
The idea of a Naira-backed stablecoin has been in the news for sometime now. Just recently, Bit Sika, in collaboration with LinovaCapital announced the launch of such a stablecoin, Africa Stable-Coin (ABCD). This project was built on the BinanceChain. Other efforts are also in place, some of which is already public knowledge.
On this note, Essien thinks that there have been a number of local efforts to create a Naira stablecoin. “At least I know the NGNT is a Naira-backed stablecoin created by a Nigerian, he says. “I would also point out that Nigerians are involved in the partnership behind the ABCD token.”
But even if the creators were not Nigerians, the value that such a project would be bringing to the space would be the same. Therefore intervention from any party that seeks to improve the market is welcome, regardless of that party’s origin. Besides, the point of cryptocurrency is to dissolve borders and democratize opportunities across the globe. Hence it’s normal for cryptocurrency creators to go where the opportunity is. If they happen to execute better than local players, it will ultimately be to the local market’s benefit. The same dynamics apply to stablecoins.
How Would Stablecoins Impact the Crypto Market?
The cryptocurrency space itself is a relatively small market in relation to the mainstream, fiat-denominated market. And a Naira stablecoin relative to the local fiat is an even smaller market, especially given the modest extent of crypto penetration in Nigeria. Considering these factors, Essien believes that it will still take some time for real measurable impact of stablecoins to be seen on the national economy. Where he expects some major impact is in the crypto space.
According to him, tokenized local projects will become more sustainable because their values can easily be liquidated into a stable Naira token. Also, new crypto users to join the space locally as more people gain confidence from the stability offered by stable Naira tokens. These new entrants will help boost adoption of such stablecoins and make them sustainable.
He however explains that growing adoption is vital to a stablecoin’s survival. This is because the problem with stablecoins isn’t so much about their creation as it is about their survival in the long-term. In other words, lasting impact is a long-term affair, so we need some time to gauge that.
It will be interesting to see if at full adoption stablecoins can boost the value of the underlying fiat by creating a parallel demand for such fiat against traditional forex. This is the sort of research we could be seeing in the future.
What To Look Out For in the Crypto Marketplace
Essien notes that in the short term, however, Nigerian crypto market participants can reorganize themselves in ways that improve the chances of survival of the absolutely essential stablecoins. That reorganization would be by itself the short-term impact of the stablecoins on the Nigerian crypto space. The sort of reorganization being referred to here will include patronizing the Naira stable coin.
As there have been suggestions that Nigerians in the crypto space tend to patronize foreign platforms, specifically foreign exchanges, getting early adoption for the Naira stablecoins may need some behavioural changes by players in the industry. Such changes may also involve collaboration amongst players to ensure liquidity for the stablecoin, as well as ensure good governance that reflects market peculiarities.
Iyke Aru is a seasoned author and educator in the blockchain and cryptocurrency industry. He has been in the business of crypto content writing for many years with thousands of his articles across several platforms on the internet. Iyke is based in Nigeria where he stands out as one of the most informed and credible figures in the cryptocurrency industry. Outside blockchain and crypto, you will most likely catch Iyke playing or discussing football with friends and family.