Stability, or predictability, provides peace of mind to investors in most markets. Wild fluctuations in stock prices cause sudden stark pessimism to take hold and grim outlooks to suddenly appear about once-promising predictions. Traders and investors prayed to their god and rubbed their lucky charms to find a way to adjust to the one-day 2% or 3% drop in market capitalization in stocks last October.
Maybe we should put ‘wild’ into perspective. Bitcoin can lose or gain 10% or more of its value in mere hours. Other altcoins may pump more than 100% in a day. Traders and investors in the cryptocurrency market tend to react much differently than stock traders to such price action. Most expect such fluctuations, and some even pray for them while poring over the minutest details of technical analysis in the wee hours of the morning. Such instability, however, poses a formidable barrier of entry to new skittish investors.
Price volatility poses a problem for cryptocurrency adoption. Stablecoins offer a solution. A stablecoin is a cryptocurrency whose value remains pegged to the value of some traditional asset such as the US Dollar or the price of gold. Thus, the value of the coin should, theoretically, have very little to no instability in terms of value. This makes stablecoins an ideal way for some people to trade and invest in other cryptos, as those stablecoins can be used to trade more volatile coins, such as Bitcoin.
Digital currency exchanges worldwide have been using stablecoins for years now because, as Biser Dimitrov points out, “they save time and money from converting crypto to fiat. They [can] just buy and hold USDT or DAI against their users funds.”
The topic has become one of such high importance that the research team at Blockchain.com released a report about the state of stablecoins going into 2019. Here we take a brief look at why and how some of the best performing stablecoins mentioned in the report have likely seen their results to-date, and what the future may hold for the state of stablecoins.
Tether has been one of the most attractive coins to use in lieu of the US dollar at major exchanges including Binance, Coinbene, and Huobi Global. The Blockchain.com report highlights Tether as far and away the best performing stablecoin on the market today in terms of market cap (~$2bil) and trading volume (~$9.2bil). Although there was a significant drop in market cap between October and November, 24-hour trading volume has increased swiftly in the past 3 months. Traders obviously enjoy using Tether, likely because it is a way for them to keep from exiting the market.
Despite its many praises and relative lasting power, Tether has major issues looming over it: scandals and real fiat backing of its assets. Recent audits of Tether’s books proved that they have the fiat to back their coins, but negative publicity abounds. As new stablecoins have hit the market and chipped away at Tether’s market share which was at 90% but now sits around 70%, it will be interesting to see how competition with Tether plays out.
As stated in the report, “Tether’s shortcomings have created an opportunity for an alternative stablecoin to enter the market.” These shortcomings reflect the worries of some investors and traders who feel that if a stablecoin loses its credibility as a fully-backed fiat alternative, there needs to be procedures firmly in place to mitigate risk and protect the market and individuals.
TrueUSD, is currently the #2 stablecoin on the market. TUSD is utilized on a the second highest amount of major exchanges to boost its trading volume (~$41.8mil) and market cap (~$205mil). Its market cap has actually increased steadily since its launch about one year ago. Also notable is the market cap spike it experienced which appears to have taken a portion of Tether’s market share.
Rather than holding opaque records of fiat reserves, TUSD uses third-party escrow accounts to back its tokens which is transparent and legally protected, a major strength over Tether. Using third-party escrow to back the value of each TUSD token has been a boon so far, especially in light of Tether’s lack of such transparency. Although a complication for the coin is its $1,000 redemption minimum for USD, Rafael Cosman, Co-Founder and CTO of TrueUSD, attested in a recent interview that there are plans to eliminate the minimum purchase amount in the future.
Cosman feels that the true value of a stablecoin like TUSD isn’t necessarily in its market cap. He identifies the most important metric as “how often people are using TUSD to trade, transact, and invest.” This speaks to the trade volume of TUSD which has made definitive gains in the past few months. Furthermore, Cosman states that “[TUSD’s] focus now is on building out more use cases so that our users can not only trade within the crypto world, but seamlessly move between fiat and crypto.”
According to the report, DAI offers the most benefits yet is counter-balanced by the complication of high complexity. This is also one of the stablecoins Biser Dimitrov touts as a stablecoin which could easily take dominance in the field in the near future.
Like TUSD, the market cap (~$88.1mil) for DAI has been on a steady upward path for at least a year, with a small correction taking place just this past November which it quickly recovered from. biggest strength of DAI is that it is the first in its class of cryptocurrencies to be collateralized entirely by other cryptos. This puts the stablecoin somewhat ahead of its time, out on a limb as it were. The governance system is entirely decentralized and under the control of MKR token holders, which provides penultimate transparency.
Additionally, the developers at Maker, the company responsible for creating DAI, are highly experienced, including several third-party contributors interested in boosting DAI’s usability. Therefore, it may come as no surprise that DAI is extremely complex. Its collateralization system and CDP model meant to keep the value stable are difficult for most to explain. With that, it looks like DAI’s constraints are bounded by the technical prowess of the developers currently working out the kinks in the nascent concept. To a trained eye, DAI may be the most promising stablecoin.
In response to the criticism of DAI’s complex technology, DAI’s Korea lead, Doo Wan Nam, assures that “from a user’s perspective, DAI is very simple for regular users.” He added that “DAI being collateralized by other cryptos gives it a regulatory advantage over other stablecoins whose banks and services may be frozen and devalued by a government.”
Moving forward, there is a very bright future for stablecoins as their use cases are expanded and more users find themselves needing them. For example, J.P. Morgan Coin (JPMC) was released only days after Blockchain.com’s report was updated. This stablecoin is built on the Quorum blockchain developed by the American financial conglomerate J.P. Morgan, and has entered the market with a splash. The coin is backed entirely by J.P. Morgan’s own fiat currency holdings.
J.P. Morgan has plans to allow users to utilize the coin on any platform. Biser Dimitrov notes that being from such a major financial institution, “JPMC has the potential to drive forward the development of regulatory approved tools for risk management, custody, and compliance,” and that “JPMC [may be] critical in setting the right framework in the banking and financial services space.”
The utility of stablecoins will not dissipate in the foreseeable future, but the usability of them will vary widely. The report from Blockchain.com also made mention of the specs for upcoming stablecoins as well. Centralized-hybrid options such as highly-backed and fully-collateralized Reserve may be vulnerable to price manipulation and liquidity/scalability. According to the report, “price manipulation of Vault assets may occur with the aim of purchasing the Reserve stablecoin at an advantageous exchange rate”; South Korea’s own Xank has partnered with a major local bank and boasts high transparency but a relatively unclear ‘self-funding system’. The company website claims that Xank cryptos ‘will serve as a stablecoin most of the time as opposed to 0% of the time.’
We can rest assured that the stability of the market rests on the development of well-planned and inspired projects that add value to the market.
Big thanks to the TrueUSD team, Doo Wan Nam, and Biser Dimitrov for responding to comment requests for this piece.