Stablecoins - Aiding the adoption of decentralized digital economies
Recent talks of decentralization have matured to an extent that they’ve piqued people’s interest in the underlying technology and its potential benefits – much more than the usual pointless conversation about the price movement of Bitcoin.
Stablecoins - Aiding the adoption of decentralized digital economies
If you're interested in the topic of blockchain and decentralization, join author Adil Harris, Blockchain Product Lead, BTM Blockchain Technology, for his session at Digital Transformation Asia on the 15th of November, wherein he delves deeper into the potential use cases and applications of stablecoins lent by their ability to be programmable. Recent talks of decentralization have matured to an extent that they’ve piqued people’s interest in the underlying technology and its potential benefits – much more than the usual pointless conversation about the price movement of Bitcoin. Being one of the few technological advancements that have combined software engineering, economics, business, and game theory, it does present itself as a rare field of study, For the uninitiated, here’s a quick primer regarding cryptocurrencies such as bitcoin and the underlying blockchain technology. Bitcoin is a digital currency not controlled by any one party such as a bank or government. It is maintained by a network of computers on the Internet that do not know each other. These computers are referred to as 'miners' or 'nodes', and they store all Bitcoin transactions in the form of 'blocks', in exchange for receiving rewards for maintaining the integrity of the network. New blocks containing new Bitcoin transactions are created every ten minutes, and they get back-linked to the previous block, thus forming a chain-like data structure. This chain of blocks is popularly known as the 'blockchain' and has properties of being tamper-resistant and publicly auditable. In this article, we will briefly cover a promising concept in cryptocurrency called Stablecoins, or crypto assets that are price-stable relative to a real-world currency, such as the USD or MYR. Today in the cryptocurrency space, the utility of most coins and tokens have been ill-defined while their values have been subjected to massive market speculation. This has resulted in daily prices fluctuating between 5%-50% on average, rendering them unusable for day-to-day transactions.
For any cryptocurrency to be a reliable medium of exchange in today’s markets, it should satisfy the following properties: Existing digital currencies have achieved these four properties in varying combinations, but none have achieved all. Price stability is perhaps the single most important property that a coin or token can possess that would aid in the currency’s adoption by the masses. This realization has resulted in the creation of a number of stablecoin projects in recent years, each one different from the other in their underlying working principle. Stablecoins use different methods to maintain their peg against a traditional fiat currency. They can be broadly classified into the following two types: Collateralized stablecoins back their assets with an equivalent or excess supply of collateral. This collateral can be either a fiat currency or a cryptocurrency (denominated in an equivalent fiat value). TrueUSD is a popular fiat collateralized stablecoin that pegs to the USD (1 TUSD token equals 1 USD). It is able to do this by maintaining a 1:1 ratio of equivalent fiat reserves in a bank account in proportion to the number of coins issued to the public. Maker Dai is another type of stablecoin that issues a fixed supply of tokens against an over-collateralized value in the cryptocurrency ether. This is done so as to protect the peg from sudden market crashes. It is implemented in a more decentralized manner wherein any user can deposit a value in ether (worth say $500) to the Maker system on Ethereum, to issue a fewer amount of Dai (worth ~$300). Algorithmic stablecoins, on the other hand, are slightly more elaborate systems that do not require collateral. They operate similar to a central bank–with the exception that their functions are completely decentralized and autonomous. Algorithms automatically inflate and deflate the supply of the currency in accordance with fluctuating prices so as to maintain its peg against the fixed fiat value. Basecoin is perhaps the best example of a project built on this concept. With the technical details aside, here are few of the less talked about advantages offered by stablecoins over traditional fiat payment systems: Most stablecoins peg against the USD due to its ready liquidity. Localized stablecoins can also offer a similar promise in the short term. They are the ideal bridge that can link existing centralized, fiat-based payment systems to the more volatile, yet decentralized, cryptocurrency networks. If implemented in the right geographies, a sufficiently decentralized local stablecoin can offer great economic value to the region.
- Price stability or the property of having a stable price level in relation to the price of goods and services in an economy
- Scalability or the ability to handle a sufficiently high volume of transactions
- Privacy or the property of storing transactional data with a level of privacy that protects confidential and sensitive transactions
- Decentralization or the property of a currency to operate free of a central decision-making entity in a manner that is free of corruption and value erosion
- Collateralized stablecoins
- Algorithmic stablecoins
- Availability - A price-stable cryptocurrency as a mode of payment will be available 24/7 without having the need to rely on a bank or third party. This is key for certain applications, such as remittances, that are unavailable on weekends and public holidays.
- Programmability - Stablecoins offer the flexibility of being programmable. They provide the opportunity of making payments automatically execute when set conditions are met. This is achieved through the use of smart contracts (or coded instructions on the Blockchain) and can significantly benefit industries, such as travel insurance and P2P lending, thereby creating a new realm of decentralized financial applications.
- Empowerment - A stablecoin, unlike fiat currency, gives users direct control of their money in digital form, in contrast to it being managed by a bank. This can potentially enable the 2.5 billion unbanked people of the world in a manner that is both decentralized and legally abiding; a combination quite uncommon in the cryptocurrency space.