Promote the progress of digital currencies in various countries. Will stable currencies such as Libra still have huge development potential in the future?

Original: Artem Popov

For potential crypto market participants, stablecoins with relatively low price fluctuations are extremely attractive to them. At the beginning of 2019, the total investment amount of global stablecoin reached 350 million U.S. dollars, and it was growing rapidly for a time.

Author: Artem Popov Source: forbes Compile: Joyce

Bitcoin, Ethereum, and other altcoins are favored by most investors with a high risk appetite. Obviously, they have one thing in common: price fluctuations are very sharp in the short term. I believe many people remember December 2017, when Bitcoin reached an all-time high of $ 19,783, but just five days later, the price plummeted to $ 11,000.

Data source: coinmarketcap

Obviously, for most potential crypto market participants, such drastic price fluctuations are likely to scare them. A few years ago, crypto assets with volatility close to zero began to emerge, the stablecoins we will discuss in this article.

01 price stable alternative crypto assets

Many crypto asset market participants want to find a safe haven, so as to have the ability to profit in the crypto asset market with sharp price fluctuations. Stablecoins provide this option.

The first stablecoin pegged to the US dollar was Tether. Tether was launched in 2014 and quickly swept the global crypto market. Although Tether did have some problems in 2017 (some legal proceedings involving Tether developers), it did not affect Tether still operating effectively in the crypto asset market. Moreover, Tether's current share of the stablecoin market is much larger than the total of other stablecoins in the crypto asset market.

02What are the types of stablecoins?

Here, it is not simply to list the stablecoins that have appeared in the market, but to classify them according to the value support behind them:

1. Linked to the legal currency or other physical assets of various countries: These include stable currencies backed by precious metals and legal currencies (USD, Euro, Japanese Yen, etc.), as well as mixed physical assets such as gold. For example, the Tether we mentioned earlier, the stablecoin pegged to the US dollar belongs to this category.

2. Linked with other crypto assets: Basically, the value support behind this type of stablecoin is generally based on crypto assets such as Ethereum, or a mixture of crypto assets and fiat currencies as the value support.

3. Algorithm-based stablecoins: The recently emerging type of stablecoins are based on algorithms, commissions, and coin taxes.

So, what is the operating principle behind these stablecoins?

For the first type of stablecoins, that is, stablecoins that are linked to fiat currencies or assets, it is very simple to understand. Each stablecoin token has a certain amount of gold (for example, 1 Token = 1 ounce of gold) or fiat currency (1 Token = 1 USD, Euro, or other currencies) as collateral. These gold or dollars and euros are real and stored in banks or designated vaults.

For the second type, stablecoins linked to crypto assets, the situation is slightly more complicated. In order to maintain the stability of the stablecoin token price, it must be supported by crypto assets that are more valuable than the stablecoin itself . This can provide protection in the event of fluctuations in the exchange rate of the cryptocurrency. Indeed, if the price of bitcoin falls too much (say, its price drops by 90%), then the stablecoin that depends on bitcoin will no longer be "stable".

Algorithm-based tokens are the least common type of stablecoin. This stablecoin does not have other crypto assets or fiat currency physical assets as the value support. The basis of the price stability of these tokens is an algorithm embedded in the code . This process is complicated, and even for those who hold these tokens, sometimes it is difficult to understand how they work. Algorithmic stablecoins are the smallest class of crypto assets, perhaps mainly because their principles are too complex and few people understand.

This type of stablecoin does not rely on mortgage assets. Its fees are controlled by software algorithms, and its regulatory system is decentralized-forces outside the stablecoin system cannot do anything about it. However, in general, the underlying architecture of this stablecoin is highly scalable, because as the supply of stablecoins grows, no additional security is required.

03 How attractive is the stablecoin to the market?

For potential crypto market participants, stablecoins with relatively small price fluctuations are extremely attractive to them. At the beginning of 2019, the total investment amount of global stablecoin reached US $ 350 million. Most of these investors are venture capital companies with large amounts of funds, such as Andreessen Horowitz, and investment institutions that specialize in crypto assets, such as Polychain Capital, Blocktower, Digital Currency Group, and Pantera Capital.

When the crypto asset market itself was unstable, the amount of investment in stablecoins increased rapidly . Moreover, in addition to the old stablecoin Tether (USDT), new stablecoins appearing on the market, such as Paxos Standard (PAX), Gemini Dollar (GUSD), USD Coin (USDC), TrueUSD (TUSD), and MakerDAO. Growing fast.

Libra, released by Facebook in June 2019, is also currently researching and launching its own stablecoin. Despite the pressure from the US regulators, I believe that the stablecoins issued by Libra will still appear in the crypto market in the near future.

04 Technology behind stablecoins

Behind every stablecoin circulating in the market is a decentralized, scalable, and blockchain with smart contracts. Only through these technologies can stablecoins strike a balance between stability, decentralization, security, and scalability.

Each smart contract contains a stability control mechanism that can minimize price fluctuations and link the price of each token of the stablecoin to the price of the collateral as a value support. Generally, the blockchain that issues stablecoins must be open source, and most stablecoins are issued based on the Ethereum network.

05 What impact will stablecoin have on the crypto market?

Stablecoins can serve as the infrastructure layer of the crypto market, and may eventually create a tipping point to stimulate the use of cryptocurrencies in the global market. Through the widespread use of stablecoins, great value can be brought to the crypto asset market.

The large-scale use of stablecoins in the future may have a huge impact on SWIFT in the traditional financial system and similar technologies used by the banking sector. The settlement of stablecoins is on-chain, with high timeliness and low prices, so the usage rate of SWIFT as a third-party settlement may decline, because stablecoins can be used for payment and value storage.

06The future of stablecoins

In fact, the price of many stablecoins fluctuates very little. Take Tether as an example. Although the price has been fluctuating in recent years, the magnitude is very small. As far as the current situation is concerned, such stablecoins, as a means of payment and profit, are extremely active in the crypto market.

Therefore, it is very likely that stablecoins will become the main payment instrument in the future and be used by ordinary people and participants in the crypto asset market at the same time. Of course, this definitely needs to meet many conditions, such as the approval of regulators in different countries, the surge in the number of blockchain projects related to these stablecoins, and the recognition of stablecoins from "traditional" investors. However, we should believe that the future can be expected.

Will stable coins such as Libra bring a market outbreak, what do you think? Welcome to share your views in the comments area.


"Disclaimer: The article is the author's independent opinion, does not represent the vernacular blockchain position, nor does it constitute any investment opinions or suggestions. A