The Definition of a Stablecoin and Why It is Important
The basic definition of this type of cryptocurrency is that it is a digital currency that is price stable. You will find that many of the typical cryptocurrencies with which people are familiar, such as Bitcoin, Litecoin, and Ethereum, there is a substantial amount of volatility. The prices of the coins are not stable at all, and they can increase or decrease drastically. While this means that there tends to be a large risk/reward with these currencies, it is not a risk that everyone is going to want to take.
Because of this volatility, it has caused some companies that were considering taking various types of cryptocurrencies for their payments to rethink their decision. They do not want to take this form of payment only to find out that after someone makes a large purchase, the value of the currency has dropped.
When you look at the concept of a stablecoin, you can quickly see why they are so important. These coins are essential because they are going to have the potential to create more stability, as the name would suggest. Many in the field believe that these types of coins are going to become more important than Bitcoin and other common cryptocurrencies that suffer from the problematic volatility that pushes away potential investors.
Stablecoins Currently Available
These stablecoins are starting to gain more momentum, and there are already about 25 stablecoin projects that are underway according to the Stablecoin Index. Some of the items that are on this list include Tether, TrueUSD, Globcoin, Stably, and Stasis to name a few of the fiat-collateralized stablecoins. There are also crypto-collateralized stablecoins including bitUSD, Dai, and Sweetbridge. Some of the lgorithmic supply stable coins include Basis, Fragments, Carbon, and Kowala. Other stablecoin options are available, as well.
All of these are relatively new, and they have not had quite as much attention in the media, or even among cryptocurrency enthusiasts, as other types of coins, such as Bitcoin and Litecoin. As more and more are starting to look into investing in this field, the attention being paid to stablecoins is starting to increase though.
Types of Stablecoin
As mentioned above, there are several types or categories of stablecoins that are being developed. It is important to have at least a basic understanding of what they are and how they work.
The fiat-collateralized coins are going to have more of a centralized structure than any other types of blockchain currency. Of course, if you know anything about cryptocurrency, one of the main reasons that there were early adopters and promoters was because it is decentralized. This is not the case with fiat-collateralized coins. This is one of the simplest ways to create a stablecoin because it is going to be based on reserves that an entity, such as a central bank, holds.
One of the coins above, Tether, uses this method. However, it is not without its problems. It has reportedly had issues with the auditors for the coins. As with any fiat-collateralized coin, those who are going to invest in the coin also need to trust the entity that holds the reserves. This is often problematic. Not only have some companies had issues like Tether, but people who tend to be interested in cryptocurrency are still wary of anything that is centralized. It is likely going to take time to resolve these issues.
The biggest benefit of this option is the fact that the coins truly are going to be stable, as long as the issuer is honest about the central entity that holds the reserves.
Another option for stablecoins are the crypto-collateralized option. Those who want to take advantage of the decentralized nature of cryptocurrency are going to want to consider this option. These coins are backed by the cryptocurrency reserves, and they are typically going to be decentralized. While this has some advantages, as it means that more of the current crypto enthusiasts are likely to choose it, there is a disadvantage. These coins are still likely to suffer from the volatility of digital currency, unless they are “overcollateralized”.
Creating Stablecoins Can Be Difficult
Many companies are trying to create the ideal stablecoin that is going to last and that will appeal to a large number of investors. However, the creation of these coins is not easy. There are many factors that need to be considered. They need to be truly stable, and a part of that will depend on economic security.
In addition, the mechanics of the token and how it works in practice are going to be important in determining whether someone wants to adopt and use the coin. In addition to the design of the coin, it will need to be adopted quickly and by a large number of people in order to become stable. This is a tall order, but companies are hoping to create coins that can finally get more people to adopt cryptocurrency and the blockchain.
It is still relatively early in the life of cryptocurrency, and the stablecoins are even newer. They are likely to continue going through growing pains over the course of the following months and even years. However, when stablecoins are perfected, or at least improved further, there is a good chance that even more people are going to want to start using them.