What are Stablecoins?
Despite the issues around them, stablecoins are becoming a more prominent part of the cryptocurrency market. Almost every week, new stablecoin advances are announced by businesses and protocols. What are the reasons behind the boom?
A stablecoin is a kind of cryptocurrency whose value is linked to that of a traditional currency, such as the U.S. dollar. Why risk your money in Bitcoin when you can invest in other cryptocurrencies instead? Traditionally, stablecoins are believed to be a bridge that allows traders to go from one cryptocurrency to another.
How Do Stablecoins Work?
Bitcoin is the most popular cryptocurrency, but it also has volatile value changes. For example, in 2017, it moved from around $5,950 in November to $19,700 in December, then back down to $6,900 by early February. The cryptocurrency’s intraday price fluctuations are sometimes extreme; the coin may fluctuate by as much as 10% in each direction within a few hours.
The public may prefer not to utilize popular cryptocurrencies like bitcoin because of this short-term volatility. Simply said, money should serve as a means of trade and a store of wealth, and it should hold its value better over the long term. Users will be less likely to embrace it if they aren’t confident in its future buying power. Ideally, a cryptocurrency should have a stable value and a minimum level of inflation, making it attractive to spend rather than hoard. Stablecoins help with this goal.
The Most Popular Stablecions
Tether, along with USDC and DAI, are the most popular stablecoins.
Tether has a commanding lead over other cryptocurrencies in trading volume, with even Bitcoin being eclipsed.
The amount of money traded in Tether (USDT) during the last 24 hours is about $74 billion USD, according to CoinGecko, and is almost twice that of Bitcoin, which is second with $34 billion USD. However, Tether is one of the most contentious projects in all of crypto due to remaining concerns about how Tethers are backed and accusations that they’re used to artificially inflate the price of Bitcoin.
Critics of Tether argue that the company artificially inflates the price of Bitcoin, and that Tether investors would be unable to divest themselves of their holdings since the pot is empty. Tether used to claim to be fully backed by US dollars, but Tether now claims to be backed by other assets, such as commercial paper.
The optics problems that affected Tether have provided Circle, the firm behind USDC, a chance to challenge the established quo of stablecoins. Publicly, Tether is happy to have competitors, but the numbers state that Tether’s market share is heavily being eaten into by a more “legitimate” stablecoin.
The USD Coin (USDC), which was developed by Coinbase and Circle, is an asset designed to reduce transfer times, simplify transactions, and make the conversion of USDs for digital currencies more accessible to customers. Circle is much like Tether in that it too has its issues.
Following the revelation that Tether and USDC were not 100% cash-backed, criticism that USDC was not a genuine stablecoin arose soon afterwards. More recently, Coinbase’s Lend program has led to an SEC investigation into Coinbase and its USDC offerings.
Dai (DAI) is a cryptocurrency that seeks to maintain a value of $1.00 per coin via the use of smart contracts on the Ethereum network. Dai is an open-source, decentralized stablecoin whose ownership is vested in MakerDAO, a DAO in which participants may vote on modifications to its smart contracts. This is done to guarantee the stability of Dai.
Dai and MakerDAO have been regarded as the first major instances of decentralized money in use. Dai is unique in that it does not advertise that it is backed by US dollars. Furthermore, Dai is supported by Ethereum and the collateral that is included in the smart contracts that underpin it.
Why are People Concerned About Stablecoins?
The simple answer is that the government might be threatened by anything that could debase fiat money.
Stablecoins, because of their connection to less volatile assets, are purportedly safer than normal cryptocurrencies, but U.S. authorities do not seem to agree. Sources close to the U.S. Treasury Department and other government agencies tell Bloomberg that the Financial Stability Oversight Council is working on a crackdown on stablecoins. It is believed that regulators are worried that the cryptocurrency’s unregulated nature poses a significant threat to the banking system.
It is generally thought that the Presidential Working Group on Financial Markets has its eye on Tether. The people in charge of the coin claimed they had balanced their finances by holding significant quantities of corporate debt. Bloomberg’s research shows that if the cryptocurrency market crashes, this may leave the currency susceptible to investor runs.
A “consensus” has allegedly emerged, even though the final conclusion isn’t anticipated until December, when the Working Group is thought to be releasing recommendations. If this does place, the governing body may classify stablecoins as risks that need severe regulation. Multiple digital currencies may be compelled to alter their business plans or perhaps shut down altogether.
How do you feel about stablecoins and their place in the crypto world?