2020 may be described as the year of DeFi, but the hype for Stablecoins has long been entrenched in the crypto space.
At Coinhako, we support US dollar backed Stablecoins such as USDT and USDC, for our Singaporean users. Funding their accounts to trade the US dollar With other cryptocurrencies.
In other regional markets that we serve, we offer trading in a wide range of stable currencies in local currencies for the local market.
So what exactly are stablecoins? How is it different from other cryptocurrencies? Or what is the perceived value of these assets?
What are stablecoins?
Stable currencies are digital assets that are designed to be of constant value over time in contrast to the fluctuations we usually see Cryptocurrency prices.
To achieve this stable value, Stablecoins are “guaranteed” – meaning that the total number of stablecoins in circulation is backed by assets held in reserve.
Stablecoins have been valuable to cryptocurrency traders in times of market volatility to hedge potential losses and maintain paper value gains during bear markets, while still sticking to these digital tokens.
The main difference between stablecoins and other tokens is that stablecoins are intended to be non-volatile and asset-backed assets to protect investors.
The supply of stablecoins is usually adjusted according to market conditions, and most stablecoins are issued by companies – this even includes commercial banks that have fiat cash in reserve like JP Morgan’s JPM Coin or FAANG companies like Facebook that are launching their own digital currency known as LIBRA.
Types of stablecoins
There are many other ways in which a stable currency can be guaranteed through physical assets; The purpose of all of them is to ensure price stability.
1. Fiat Supported Stable Coins
Most commonly, stablecoins are backed by fiat currencies such as the United States dollar (USD) which value each dollar token that is held securely by a central trustee such as a bank.
2. Commodity-backed currencies
A commodity-secured stablecoin operates roughly the same as a guaranteed stablecoin. The main difference is that it is backed by some commodity like gold, silver, or even Kilograms of bananas.
3. Cryptocurrency-backed stablecoins
Cryptocurrency secured stablecoins have a cryptocurrency designated in a reserve fund to support the currency. However, due to the volatility of the cryptocurrency, the price / earnings-to-growth ratio (price-to-price ratio) is not 1: 1.
4. Unsecured stable coins
Unsecured tokens rely on mechanically generated algorithms that are able to change the size of a supply to preserve the token price. They rely on smart contracts to sell tokens if the price falls below the link level or to supply the market with tokens if the value increases.
How did stablecoins become?
BitUSD is the world’s first stable currency It was released on July 21, 2014. This was the product of two leading figures in the cryptocurrency industry, Dan Larimer (EOS) and Charles Hoskinson (Cardano).
In 2015, RealCoin was introduced and became what is now known as Rope (USDT). Tether is built on the OMNI blockchain and has been a leader in the stable cryptocurrency market since 2015.
Still confused? Here’s a video to help summarize everything we’ve covered so far:
Are stablecoins regulated?
Despite being classified as a “stable” asset class, stablecoins come with a unique set of regulatory concerns.
Combine features of different financial services – stablecoins include features of payment systems, bank deposits, foreign exchange, commodity and crowdfunding instruments.
As a result, they pose financial stability risks.
To combat illicit financial activity such as money laundering, regulators in various countries may enforce guidelines that require stable currency trading platforms to implement KYC policies.
Differences and concerns regarding a stable currency
1. Lack of capitalization
Secured stablecoins pose the risk of under-capitalization, as there is uncertainty surrounding the sufficiency of fiat reserves held to support the asset’s value.
Since guaranteed stable currency rates are tied to assets held in reserves, controversy arises when it becomes difficult to verify whether these firms actually have sufficient reserves.
This can happen when companies do not disclose their banking relationships, as this information is required for verifications.
2. Price stability
Although stablecoins have been marketed as a stable digital asset, market movements in the past have revealed that stablecoins may not necessarily be immune to high market volatility.
When the crypto flag dropped in October 2018, Tether dropped below $ 1 USD. Earlier in March this year, Tether (USDT) fell to $ 0.96 during a period of high market volatility.
Are stablecoins issued by companies only?
2020 has also created an uproar around Central Bank digital currencies (CBDC).
These are digital currencies that are issued by regulators in different countries, and they are primarily designed to be pegged to the value of a country’s local currency.
Several countries have given us a sneak peek at their CBDC projects since 2019, and here’s a brief summary of what’s going on:
Singapore dollar token (SGD)?
Even here in Singapore, our local financial regulator has been involved in developing a A token copy of the Singapore Dollar (SGD) under the Ubin project An initiative by the Singaporean government to improve Singapore’s financial ecosystem using blockchain technology and Distributed Ledger Technology (DLT).
China and the digital yuan
After a brief period Facebook announced its own digital currency, Libra, The People’s Bank of China announced that it will intensify the development of its central digital currency.
The digital yuan was intended, according to data from the Central Bank’s Digital Currency Research Institute, to replace some banknotes, coins in circulation and small-scale transactions.
The Bank of France (Banque de France) launched a series of experiments to test its potential central bank digital currency (CBDC) for financial institutions in early 2020. With the aim of ramping up the efficiency of the French financial system and fostering greater confidence in the currency, the Euro Digital Pilot is putting France on its way to becoming more tech-savvy. blockchain.
According to the French financial publication reverberation The Digital Euro Pilot Program has targeted private players in the financial sector, and will not be used for retail purposes.
Will the US dollar be denoted by the United States?
The Fed’s plans to denote the US dollar are already under discussion.
What’s next in the Stablecoin space?
What does the future hold for stablecoins?
While we cannot say with certainty what the next stage in the world of stablecoins will be like, many exciting developments are likely to collapse in the coming years.
With the right regulatory framework in place, stablecoins have a lot of potential – not only in terms of trading cryptocurrencies, but also for filling gaps in traditional payment systems around the world.
This article originally appeared Quinhaku It is reposted here with permission.