Cryptocurrencies are extremely volatile, they experience price swings that are not commonly present in traditional financial assets. Bitcoin is known for its nature of going on parabolic bull runs that inevitably end in cataclysmic-level bear markets. This is exactly how Jason Cassidy, President of Crypto Consultant puts it.
Cassidy believes that stablecoins are the cryptographic answer to this issue of price volatility. He describes stablecoins as exactly what its name suggests – cryptocurrencies that are pegged to other assets that are known for their relatively stable nature. The assets are pegged 1:1 with each stablecoin being backed by the underlying asset it represents. National currencies like the US dollar and gold are popular examples of stablecoins in the market today.
For instance, in the case of gold, 1oz of physical gold will be equal to 1 gold-backed stablecoin and $1 USD will be equal to one Tether, a popular US dollar stablecoin. Well run stablecoins will hold the underlying asset their stablecoin is pegged to in reserve, with periodic audits to ensure each stablecoin is truly backed by the asset it represents.
What Are the Benefits of Stablecoins?
Cassidy notes that the benefits of stablecoins are numerous. The first and the most obvious in that it offers investors a way of getting access to an asset class without having to hold the asset itself (think bars of gold). He explains that there are non-cryptographic versions of this that have existed for some time, so the novelty here is that one can now hold a cryptographically secure version of this asset. In addition, the barriers of entry to getting access to these assets are often much higher in the traditional banking system than with cryptographic versions.
The next benefit that Cassidy notes is the ability to move from large-cap coins like Bitcoin or Ether to the US dollar without having to formally cash back into fiat on the exchange. To make use of traditional digital US dollars, one would have to withdraw the currency from the crypto exchange and send it back to their bank. This takes time and money, which may make all the difference to the investor. Stablecoins pegged to national currencies allow the holder to gain access to the currency without having to go through the traditional banking system, depending on what they plan to do with the funds.
Another plus in this scenario is the ability to move your US dollar-backed stablecoins off the exchange.
Also according to Cassidy, in times of financial turmoil, it may prove much more palatable for an investor to move their US dollars into a secure crypto wallet opposed to leaving them exposed to theft or denial of access. Essentially, holding a fiat currency-backed stablecoin allows you to reduce your third party counter risk.
Are There Weaknesses With Stablecoins?
This does not mean that stablecoins are not without their faults though. A stablecoin is only as valuable as the peg holds. If for any reason there is a crisis in confidence in the underlying asset (gold, US dollars or another national currency) you may be much better off having the ‘real thing’ opposed to a cryptographic asset that represents it.
And finally, there is a company involved in these stablecoins at the end of the day. Companies mean human beings and humans are prone to a host of issues including trust. Make sure you do your due diligence before investing into a stablecoin to ensure the group behind it is public, has a clean background and is transparent in their operations (communications and third party audits).
In our previous post, the Africa Stable-Coin (ABCD) was identified as a Naira-backed stablecoin that was built on the BinanceChain. Although it has been recognised as the first Naira-backed stablecoin by some media outlets, certain facts appear to disprove this fact. In the above mentioned post, even the CEO of InfractA, Daniel Essien made a clarification on this matter. He noted that other Stablecoin projects like NGNT have been in existence long before the arrival of ABCD Stablecoin.
This fact check is corroborated by Eric Annan, CEO of KuBitX Exchange. According to Annan, other projects have existed on Stellar.org and performing well for long periods already. He notes that Stellar holds the reputation for accommodating stablecoins that have real use cases. He says;
Every deep practitioner of this ecosystem knows that stablecoins that has real use cases are built on Stellar.org. Anyone can find this and check it’s usage.
Even in reply to a tweet by Binance CEO, Changpeng Zhao, Annan made this same clarification.
Annan notes that there could be other reasons why certain projects could come up with suitable claims in the industry. However, he insists that the facts and results are always there to speak for themselves. “These are assets that have been used to do cross border payments recognized by the SDF and its global partners,’‘ he concludes.
How Has the Crypto Industry Evolved?
The crypto ecosystem is still evolving and is characterised by projects at different levels providing philosophies that call for possible debate. A significant level of the achievements that the industry has received so far is as a result of these debates and healthy arguments. Such situations warrant for more responsible practitioners and people who put in serious work to create genuine products.
As a result, every crypto user owes the industry the responsibility of scrutinizing projects and claims. Even bigger projects like Bitcoin, Bitcoin Cash and Ethereum are still undergoing series of community debates. Perhaps it will be a good thing for the stablecoins community to adopt such an approach in order to make the most out of this innovative technology.
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.