09 Oct
2018
Opinion , Markets

What is Needed for Stablecoins to Succeed

George Nicholson

Stablecoins have seen an increased demand since the beginning of the year and have been doing so since 2017. We take a look at the changes needed for the coins to be made more viable.

What is a stablecoin?

Stablecoins (or stable coins) are a form of cryptocurrency which are paired to a traditional stable asset like the U.S dollar or a crypto asset like Bitcoin.

Current market

Whilst cryptocurrencies like Bitcoin, Ethereum and Ripple can be quite volatile, increasing or decreasing in value quite dramatically, a stablecoin does not fluctuate. As these coins pegged to a traditional asset like fiat currency some economists believe that these stablecoins are a more viable option for cryptocurrency to be used every day. 

The current stablecoin market is around $3bn, a relatively small amount considered the enormous $203bn trading market for crypto as a whole. Tether (USDT), the eighth most traded cryptocurrency on the market, is an example of how stablecoin trading can work and it makes up for 98% of current stablecoin trading on the market. 

The Blockchain report

Blockchain, an early cryptocurrency firm, published a recent report outlining the current state of stablecoins in the market; highlighting a number of key points regarding the growth of these coins. Looking at a total of 57 active stablecoins, 23 of which are live, including Tether, TrueUSD and Dai, the report analyses the overall success of stablecoins in the market, breaking them into two separate categories: asset-backed and algorithmic. The report outlines that:

"Of the asset-backed stablecoins, a higher percentage (54%) utilize on-chain collateral (i.e., cryptoassets like ether) versus off-chain collateral (46%) (i.e., US dollars held in escrow)"

Ethereum was the most popular choice for these stablecoins to place themselves, with around 60% choosing to use the ERC-20 blockchain provider as their network. These ERC-20 stablecoins represented more than any other. Bitcoin, Stellar and NEO were among the other top performing stablecoin project platform choices.

It is evident that the crypto industry realises there is much demand when it comes to developing a stable coin that works for all. However, this data is important to understanding how stablecoins can achieve overall success but highlights how far these coins must go in order to be adopted. The report states:

"While there is a great deal of excitement surrounding stablecoins, the technology is still nascent and it is highly unlikely that the perfect stablecoin design exists at present; further experimentation (and innovation) is expected... Due to the aforementioned design uncertainty, as well as regional factors (e.g., local regulations), space may exist for approximately 5-8 significant stablecoins in the short to medium-term"

Although the comprehensive report shows the overall successes of stablecoins, it goes on to outline the weaknesses that are currently holding the industry back. The lack of stablecoin regulation is something that the U.S authorities have highlighted on multiple occasions. Stablecoin criticism is also highlighted when pegged to crypto assets. 

As some of these coins are pegged to crypto assets like Bitcoin, there is also a lot of room for price fluctuation, something that is not favoured when it comes to being a stable coin. Sherman Lee states that: 

"An optimal cryptocurrency should have the following four traits: price stability, scalability, privacy and decentralization"

Until these coins are able to have a price that is stable when asset-backed, there will always be much doubt about the overall success. Whilst the report highlights the success that stablecoins have the capability to bring it also highlights the flaws that still face them.

Final thoughts

Whilst stablecoins represent a great idea when it comes to cryptocurrency adoption there is still much to do in order for these coins to become a mainstream success.