The rise and rise of Stablecoins

The rise of Stablecoins

AVC blogged about stablecoins today. There is this detailed wiki on this topic that has upto date information about different stable-coins and the reasons why cryptocurrencies that have less volatility – often with 0 volatility, are useful in different markets.

On the overall crypto-markets are characterized by volatility, so much so that it has made equity market veterans call it names.  Bitcoin has risen by 100x in the past 4 years, and so has Ethereum. However, in between Bitcoin dropped a massive 70% in its USD value within 6 months, and Ethereum dropped about 80%. This volatility makes crypto-currencies attractive to speculators, arbitragers and such but reduces its attractiveness as a medium of value exchange. Behaviorally, while majority of bitcoin owners  would either hoard this as a long term asset similar to gold or diamond, a minority of them would trade it in the short term in expectation of profits.

This has given rise to the mushrooming of Stablecoins across global cryptomarkets. While Tether was the first stablecoin, supposedly backed by liquid assets, and audited, there are newer approaches to creating stable-coins. USDC is another such stablecoin, predominantly used by traders on Coinbase, by far the world’s largest cryptoexchange in terms of total assets stored. USDC though is backed by the US-Dollar held in a bank account. TrueUSD is another stablecoin that promises to back up each crypto with a dollar in the bank account. Dai is another stablecoin, backed by other types of assets stored and recorded on the Ethereum Blockchain. The Dai value proposition is similar to that of tether or USDC, except that it is backed by assets and not by another currency. While all of these i.e., tether, USDC and Dai are pegged at a 1:1 ratio of crypto to USD, Libra is another cryptocurrency which is supposed to be a low volatility stable-coin backed by different forms of assets from currencies, bonds, etc..

This space of stable-coins is seeing reduced volatility assets such as gold, silver and other metals being transferred onto the blockchain, most predominantly onto the ethereum blockchain. Over a period of time we will start seeing innovations in this sector that will bring assets such as mortgage rates, lending rates, etc. onto the blockchain at very low volatility, and amenable to trade. This is extremely beneficial to the entire sector.