2020 can usually be considered the year for DeFi, but the hype for Stablecoins has long been established in the crypto space.
At Coinhak, we support stable USD-supported coins, such as USDT and USDC, for our Singaporean customers to finance their trading accounts in USD with other cryptocurrencies. In other regional markets we serve, we provide trade for a wide range of stable coins with local currencies, for the local market.
So what exactly is stable money? How are they different from other cryptocurrencies? Or what is the perceptual value of this property? Find out all about it in this piece!
What are stabilized?
Stablecoins are digital assets designed to have a constant value over time, as opposed to the instability typically seen in cryptocurrency prices. To achieve this stable value, stable coins are “collateralized” – meaning that the total number of stable coins in circulation has assets held in reserve.
Stable values of stable coins were valuable to crypto traders in times of market volatility to protect themselves from potential losses and keep profits in fiat values during bear markets while still being able to keep these digital tokens.
How are Stablecoins different from other tokens?
The key difference would be that stable wallets are intended for non-volatile assets and with the support of assets to protect investors. The supply of stable coins is also usually adjusted to market conditions, and most stable coins are issued by companies – this even includes commercial banks that have fiat money as a reserve like JPM coins JP Morgan or FAANG companies like Facebook working to issue their own digital currencies known as LIBRA.
Types of stable coins
There are many other ways in which stable coins can be secured by physical assets; The purpose of all of them is to ensure price stability.
1. Fiat supported stabilized
Most often stable coins support fiat currencies such as the US dollar (USD) which values each token into dollars that a central custodian like a bank safely keeps.
2. Stable money backed by commodities
Commodity collateralized stabilcoin works almost similarly to fiat collateralized stabilcoin. The main difference is that behind it are some goods like gold, silver or even kilogram of banana!!
3. Stable money backed by cryptocurrency
Stabilizers collateralized in cryptocurrency have a specific cryptocurrency in the reserve fund to support the coin. However, due to the volatility of the cryptocurrency, the price-to-earnings ratio (PEG ratio) is not 1: 1.
4. Non-collateralized stabilizers
Non-collateralized tokens rely on mechanically generated algorithms that can change the volume of supply to maintain the price of the token. They rely on smart token sales contracts if the price falls below a click or to supply the token market if the value increases.
How did they come to be stabilized?
The world’s first stable bitcoin BitUSD was released on July 21, 2014. This is the product of two future leading figures in cryptocurrency, Dan Larimer (EOS) and Charles Hoskinson (Cardano).
In 2015, RealCoin was introduced and became what is known today Tether (USDT). Tether is built on the OMNI chain and has been a stable market leader since 2015.
Still confused 🤯? Here’s a video that will summarize everything we’ve covered so far:
Are regulated stabilized?
Although positioned as a “stable” asset class, stable money comes with a unique set of regulatory problems.
Combining the characteristics of different financial services – stable coins include the features of payment systems, bank deposits, foreign exchange, commodities and collective investment funds. As a result, they pose risks to financial stability.
To combat illegal financial activities such as money laundering, regulators in various countries may impose guidelines that require stable currency trading platforms to implement Know-Your-Buyer policies.
What are other controversies or concerns about stable coins?
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Collateralized stable coins pose a risk of undercapitalization, where there is uncertainty about the adequacy of fiat reserves held to support asset values.
Because the prices of collateralised stable coins are tied to assets held in reserves, the controversy arises when it becomes difficult to verify whether these companies actually have sufficient reserves. This can happen when companies do not disclose their banking relationships because that information is needed to conduct checks.
Although stabilizers are sold on the market as stable digital assets, market trends in the past have revealed that stabilizers do not necessarily have to be immune to high market volatility.
When the crypto-economy broke out in October 2018, Tether fell below 1 US dollar. Earlier in March this year, Tether (USDT) fell to $ 0.96 during a period of high market volatility.
Is stable money issued only by companies?
The year 2020 also spawned a fuss over the digital currencies of the Central Bank (CBDC). These are digital currencies issued by regulators in different countries and are mainly linked to the value of the country’s local currency.
Many countries have given us a highlight in their CBDC projects since 2019, and here is a brief overview of what is happening:
Tokenized Singapore Dollar (SGD)?
Even here in Singapore, our local financial regulator has shared the development of a a tokenized version of the Singapore Dollar (SGD) as part of the Ubin project – an initiative by the Government of Singapore to improve Singapore’s financial ecosystem using blockchain and distributed book (DLT) technology.
China and the digital Yuan
Soon after Facebook has released its own digital currency, Libra, The National Bank of China has announced that it will accelerate the development of its own centralized digital currency.
The purpose of the digital yuan, according to the Central Bank’s Digital Currency Research Institute, was to replace some banknotes and coins in circulation, as well as for small transactions.
The Banque de France has launched a series of experiments to pilot its potential digital currency central bank (CBDC) to financial institutions in early 2020. With the aim of increasing the efficiency of the French financial system and strengthening greater confidence in the currency, the digital euro pilot sets France becomes a major adopter of blockchain technology.
According to a French financial publication Echoes, the digital euro pilot was aimed at private players in the financial sector and will not be used in retail.
Will the US tokenize the US dollar?
Plans to tokenize the U.S. dollar by the U.S. central bank are already well discussed.
What are the latest stable space updates? What can we expect next?
What future will stable coins have? While we cannot say with certainty what the next milestone in the world of stable currencies will be, many exciting events are likely to unfold in the years to come.
With an established legal regulatory framework, stable money has a lot of potential – not only in terms of cryptocurrency trading, but also in filling gaps in traditional payment systems around the world.
This article was originally published on Coinhako and is published here with permission.