While Bitcoin is the cryptocurrency that introduced blockchain technology, a significant amount of spinoffs and other blockchain-based projects have come in its wake. One of the most notable additions is that of stablecoins – cryptocurrencies tied to a physical asset like fiat money or a commodity.
Why tie it to fiat? Well, traditional cryptocurrencies like Bitcoin and Ethereum, despite their benefits, are volatile. That volatility turns off accredited investors and other interested buyers who would otherwise be interested in digital assets.
This is where stablecoins come in – offering the ability to trade and store value on a blockchain without worrying about volatility and losing one’s investment. Projects like Tether, Goldcoin, and Paxos Standard are popular stablecoins that are backed by different assets.
Take Tether, for example. Tether is a stablecoin tied to the value of the United States dollar. The idea is that users can still utilize the power of a dollar even on cryptocurrency exchanges that don’t support fiat. They can still trade it for other assets on the platform or even hold USD there for later. It’s safer than holding those funds in Bitcoin, considering the asset’s price could drop hard at any given moment.
Goldcoin is an Ethereum-based, gold-backed cryptocurrency that allows investors to take ownership of physical gold bullion. Users can purchase any amount of Goldcoin they’d like, all while keeping their identity a secret. The company behind Goldcoin stores its gold in a secure vault with top-level security measures, and users can redeem their Goldcoin for physical bullion whenever they’d like.
Essentially, it’s a safe way to own bullion that handles the storage process for you.
Similar to Tether, Paxos Standard is a stablecoin tied to the United States dollar. It allows for instant transactions around the world at any time, and it doesn’t charge any fees for converting or redeeming fiat into Paxos. The group uses a third-party auditor service to build trust.
Only So Stable
However, stablecoins aren’t perfect. For one, while they’re typically said to run 1:1 to the fiat currency or commodity they’re tied to, some believe the local backing is only partial to what it should be, with the exchange Bitfinex allowing margin trading with Tether. Many are worried because those who control Bitfinex also control Tether, making it a centralized cryptocurrency.
That, and Bitfinex won’t release the papers behind the Tether cryptocurrency, meaning there’s no actual proof of these reserves out there. The irony is, despite stablecoins taking advantage of blockchain technology, they’re actually mostly in control of the company that develops them – defeating the entire point of an autonomous digital currency.
To counteract this distrust, many companies bring in third-party auditors to check that the reserves are there. However, this can only build trust in so many people, and many will still lean toward traditional cryptocurrencies for that reason.
Other stablecoins are backed by physical assets like gold or silver, though these run the same risks as the fiat-backed ones – in that companies still get involved. The answer to this type of stablecoin is the crypto-backed one.
Crypto-backed stablecoins utilize cryptocurrency as collateral, with users gaining ownership of these coins via smart contracts. Basically, a user will put their own currency up as collateral and earn some stablecoin in exchange. To get their currency back, they pay back the stablecoins, plus interest, and their locked funds are released.
Like many proof-of-stake networks, crypto-backed stablecoins trust the governance system behind a network to provide the value. Assuming the platform has a well-intended group of validators behind it, utilizing a crypto-backed stablecoin is ideal for those worried about third-party companies getting involved.
Why Use a Stablecoin?
As mentioned, many use stablecoins due to their value as a decentralized asset without volatility. However, there are other use cases, too. For example, stablecoins are used as a hedge against the economy failing, as well as against volatility in more traditional cryptocurrencies, like Bitcoin.
Many use stablecoins to transact value worldwide, maybe to their families in another country or to make a business deal. Cryptocurrencies have much lower transaction fees than traditional global bank transfers, and they’re much faster, too.
Stablecoins allow us to represent physical value and transact it in a streamlined way. Stablecoins may serve a similar purpose to Bitcoin and other cryptocurrencies, but stability is the big selling point – and one that’s about as useful as can be.
CaptainAltcoin's writers and guest post authors may or may not have a vested interest in any of the mentioned projects and businesses. None of the content on CaptainAltcoin is investment advice nor is it a replacement for advice from a certified financial planner. The views expressed in this article are those of the author and do not necessarily reflect the official policy or position of CaptainAltcoin.com