The New Crypto-Craze: Stablecoins

Tether was the first stablecoin to be created, and is pegged to the value of the US Dollar.

With over 50 projects in development, ‘stablecoins’ are blowing up in the crypto space. They’re a simple concept: cryptocurrencies whose price are pegged to a real-world asset such as gold. With the current market crash, it’s no wonder that stablecoins are rising in popularity due to a basic establishment of trust in price.

According to a new report by Blockchain, the “number of active stablecoin projects has dramatically increased over the past 12-18 months and more than a dozen project teams have stated they plan to launch in the coming weeks/months.” So, it’s no arguing that they’re hot right now in the crypto space. But who are the big contenders — and what are the new developments?

The Stablecoin Craze

Today, Tether is by far the most popular stablecoin and is used primarily as a crypto-replacement for the dollar. It’s the most traded stablecoin as well and is currently valued over $2 billion. Tether claims that all of their printed currency is backed up by real dollars and they even did an audit with a major law firm based in D.C. just this past June.

However, the question still remains not just for Tether, but for all stablecoins: how do we know what they are saying is correct? Do they actually have their cryptocurrency backed up by a real-world asset?

Take, for example, Gemini which recently put out their Gemini dollar. Despite many stablecoins claiming to be backed by real-world assets, many of them are still yet to be audited or they’re still in the works. Gemini dollar, for example, was approved by the New York Department of Financial Services. It’s this basic level of trust and regulatory oversight that has the potential to make stablecoins here to stay.

In fact, stablecoins do serve an important function in the crypto-ecosystem. If the goal of the space is someday make most real-world assets reified digitally, in a distributed ledger, then it would make sense that most of our current assets today, such as gold or oil, should have their crypto-equivalent. However, stablecoins have to be created by existing, large firms who have that kind of real-world supply where they can back their cryptocurrency. If they don’t, then they are effectively printing money out of thin air.

In yet another example, Goldman Sachs-backed Circle is creating their own ‘US Dollar Coin’ which will be a foundational piece of rebuilding the entire financial sector on top of crypto. In effect, it makes the conversion from fiat to crypto much easier. According to Blockchain’s report, some “$335 million in venture funding has been raised by all stablecoin project teams to date.”

Perhaps the reason so many are now appearing is because of the criticism Tether has received over the years and people want alternatives. This is part of the reason why Circle is creating ‘US Dollar Coin.’

Reason to Be Skeptical

However, others see this current craze as reason for concern. For example, some have commented that the real shady purpose of stablecoins would be for exchanges to move funds without having to pass through the banking system. It would essentially allow for a suspension of regulatory oversight. However, given that many of the emerging stablecoins are state-backed and regulated, this might be a forgone concern. Perhaps it was valid a year ago, but now, with the amount of oversight present, it seems less pressing.

In a lengthy blogpost, Preston Byrne, who is a fellow of the Adam Smith Institute and former COO of Monax, has called stablecoins “doomed to fail.” In the post, he accounts for the history of the space and how its underlying motive was also shady. How Bitshares in 2014, for example, tried to create its own “USD peg” system and after 100 hours, failed to produce the necessary infrastructure for it to succeed. However, is Byrne really considering the maturation of the space since then?

It seems that, although the craze may be blown over and many of these projects might fail in the long-run, the real regulatory oversight following these projects means that tokenized real-world assets are likely here to stay. If the goal of the crypto space is to integrate all of these many different aspects of the real-world economy into a digitized, blockchain-based form, then we should welcome stablecoins as crypto’s next real development. It is merely one piece of the puzzle in the greater adoption model that we are slowly building towards.