It’s not a stretch to conclude that 2018 has been a pretty dire year for crypto. Prices have been depressed and valuations have tanked on a flurry of negative news. That being said, there has been plenty of innovation and experimentation in crypto that bodes well for future progress. One type of innovation has been stable coins. This post will dig into these coins, consider the problem with stable coins and discuss if whether they have a genuine use case.
What is a stable coin
A stable coin is a fiat pegged asset that aims to tackle the volatility of crypto through digitally fixing their value in terms of dollars (or an equivalent fiat currency).
Tether has been particularly thriving as one of the most heavily traded stable coins.
The primary use of Tether is that it offers some stability to the otherwise volatile crypto space and offers liquidity to exchanges who can’t deal in dollars and with banks (for example to the sometimes controversial exchange Bitfinex).
The problem with stable coins
Beyond this stable coins are struggling to prove there worth.
If we consider the central founding premise of Bitcoin being a move away from a centralised issuing authority, stable coins represent the opposite of this idea. i.e. we are getting behind a privately issued asset that is ‘tethered’ to the system that we are trying to pull away from.
Add this to the fact that we are not only getting behind a government backed asset, but one which is backed by a generally unknown third party. Therefore the risk of corruption and fraud are high.
When we consider stable coins, we must ask ourselves is it better to abandon fiat for a coin which is also centralised? Is the coin better than generally safe government backed fiat, especially when the risk of corruption is high?
Don’t get me wrong central banks have their problems, but to transfer our faith into both central banks and a stable coin is a tough call to sell.
Is there any hope for a true stable coin
The problem with stable coins in their current form are simply not stable. But they could be in the future. What would this look like? Here’s a check list of where the coin would need to be:
- It will run on its own independent blockchain
- It will support a large ecosystem with a stable and significant number of the daily transactions
- The value of the currency will correlate to the size of the network
- The coin will not be backed by USD or any other currency
- Organic fluctuations in value will be a result of supply, demand and sentiment
- The value will not be beholden to manipulation such as token burning
When a cryptocurrency evolves that is truly stable, then this will be a great advance for the cryptocurrency industry as a whole.