Created nearly 10 years ago by a person or a group of people hiding their identity under Satoshi Nakamoto alias, the Bitcoin network has gone a long and bumpy road. What was at the beginning, the mysterious ‘cryptocurrency’ used by very few users, for unknown purposes, has become the most recognizable and widely accepted technology (even regulated in many countries).
The world soon recognized the advantages of Bitcoin over the FIAT money as it perfectly meets most of the functions of regular money. Serves as a medium of exchange/ payment (local and international), is a value measure (although isn’t the best at keeping it).
It was created based on extremely advanced cryptography and P2P network, so bitcoins can be moved fast – without any middleman – and securely. The cost of international payments by money are generated by currency exchange and bank fees not mentioning the time they take. To compare Bitcoins are instantly transferred to another account – for a fraction of the traditional transfer’s cost – regardless the international borders.
- virtual money, can be used to pay instead of fiat money
- anonymous transactions
- instant transfer
- low transfer fee regardless international borders
As time went by its weaknesses became more and more visible. What was bitcoins huge advantage – anonymity – started to be used by criminals. But the biggest cryptocurrency problem turned out to be its vulnerability to speculation and high volatility of the exchange rate, which makes it high risk for business use. Still, the technology itself is so innovative that new ways to enjoy its benefits are sought while trying to maintain relative stability.
Cryptocurrency seem to be the perfect tool to replace traditional money. Why isn’t it though? Crypto’s widespread adoption is effectively blocked by the highly volatile exchange rate. No large business can afford to take on such a high risk, since the price of cryptocurrencies can fluctuate by a dozen percent daily. Although, experts are already working on a solution that retains all the best features of cryptocurrencies and fiat money – stablecoins.
What is stablecoin?
Stablecoin is a cryptocurrency having a parity with an actual and relatively stable asset, such as fiat currencies do – most often a dollar or euro with collateral in the price of gold or oil. The way of combining these two worlds (real and virtual), and the level of its transparency, raises the credibility and usability of a given solution.
Different types of stablecoins
There are also stablecoins on the market that are not connected to the real world (such as eg Maker DAO) and their stability is guaranteed by extensive algorithms correcting their course. However, such solutions also have quite significant disadvantages. In order to be able to remain fully decentralized, they must be supported by a blockchain parent network such as ethereum, which in practice means that all of this technology (with its threats and weaknesses) is automatically transferred to those stablecoins. If the network is clogged – as it was in the case of the famous cryptokitties game – also the transfer of such stabelcoins is very slow and might be unprofitable.
Tether – success or failure?
In terms of capitalization, Tether (USDT) is the largest stablecoin, since its exchange rate is related to the US dollar one-to-one, which theoretically secures it in one hundred percent. However, the project has been criticized for a long time for lack of transparency (it’s unknown where Theter holds its coverage), and not carrying out any audits. In addition, the creators of Tether were accused of manipulating the price of bitcoin, when in December 2017 its price reached over $ 20’000. When the rumors spread about the possibility of removing the coin from the largest stock exchange – Binance and stopping the coverage payments by the project, Theter underwent another big crisis.
Because of the trust issues, over the last two months, Tether has reduced its capitalization by more than a billion dollars, in favor of competitive stablecoin projects such as TrueUSD (TUSD), Paxos (PAX), Gemini Dollar (GUSD), USD Coin (USDC). The growing popularity of stablecoins, which adopted the same assumptions as USDT, is likely caused by eliminating shady practices through which Tether lost its trust. Being regulated and regularly audited, they quickly took their place in the first hundred of cryptos in terms of capitalization and have a stable growth.
What’s the next step for cryptocurrencies?
The idea of stablecoins is gaining more and more popularity and interest, but it is still difficult to implement. Cryptocurrencies have been operating on the market for a decade, and yet they have failed to create a fully safe, decentralized and effective solution. It was predicted that 2018 will be the year of stablecoins because of the number of teams working on providing this solution, but we still have to wait a while for a breakthrough.
In the current unstable situation on the crypto market, stablecoins seem to be the ones to give hope for widespread adoption. They are a great tool to protect funds while maintaining all the advantages of cryptocurrencies.
On the other hand, this kind of virtual currency – secured by fiat money – raises objections of the community of developers and advocates of cryptocurrencies, which were supposed to be a rebellion against the current centralised economy controlled by banks.
However, every breakthrough requires compromises. Undoubtedly, the development of stablecoins will be one of the most important trends that may affect the wide adoption of cryptos. It is worth to observe this phenomenon, as it might become a real game changer.