Crypto products have attracted more and more people to invest in them during the last few years. Some of the main aspects investors are looking for are reduced risk and less concerns regarding instability and volatility. Stablecoins have earned a front row seat, because they provide more stability compared to the one digital assets generally enjoy.
It seems as if stablecoins present the ideal combination of crypto and the world of fiat money. On one hand they are decentralized from any central banking systems, they provide transparency, security and user anonymity, on the other hand their price is relatively stable similar to that of real-world assets.
Coins Pegged to other assets
Stablecoins are mainly pegged to fiat currencies, gold or other precious metals. Some of them can be also pegged to other cryptocurrencies or they can use a “seigniorage” technique which is used when coins are produced in a way similar to that of a central bank printing fiat money. There is also something called a Petro coin, which is backed by Venezuela´s oil reserves — but we can safely consider this one as a tidbit.
Stablecoins are linked to base currencies (frequently to US dollar, euro, Swiss franc) or to a specific quantity of gold. Usually one token equals one gram of gold. This relatively rare element, as well as other precious metals, must be held in reserve and entities should only issue an amount of stablecoins equal to the reserve they own. Before investing, each investor should check if the issuer provides information, where the gold is being stored. It should be a third party holding the gold reserve.
OneGram as a member of the stablecoin family
Hence, some kind of stability is the most valuable characteristic of stablecoins. In case of gold-backed stablecoins, the price wouldn’t fall below the current price of gold. New coins can be issued only when the actual gold reserve of the issuer grows. This also means, that one token will never be cheaper than the actual price of gold because of their permanent interconnection. However, it can become notably greater, if that specific digital asset becomes successful and popular. Such is the case of the Dubai based digital asset called OneGram, which is pegged to gold the way that each OneGram token is backed by one gram of physical gold. Due to the high liquidity and popularity of OneGram, its price has rocketed recently as a proof of its stability despite bearish tendencies on the market.
Stablecoins are the most centralized digital asset. Some may argue that their inherently centralized nature is a major disadvantage, as one company owns all the gold, and this could present a certain risk of a single point of failure, but many skilled investors consider stablecoins to be a lifeboat in case of bad news on the market. In the past, many traders sold their cryptocurrencies for stablecoins such as Tether, which is backed to US dollar, in order to preserve their investment value. By using stablecoins, they diversified their portfolio in times of market instability.
Moreover, issuers of fiat- or gold- backed digital assets need to have public records of their holdings, because they store large amount of fiat money or gold.
Stablecoins are also the ideal interface between cryptocurrencies and the fiat world. If the society is going to continue its shift towards cashless operations and the governments will capture and properly react to these trends, the future of stablecoins is more than promising. The governments from different parts of the world will probably not accept any mass adoption of cryptocurrencies, because of their decentralized nature and high volatility. But exactly this can be used by stablecoins as they use some mechanisms from the fiat world as was mentioned above. A decentralized payment system built on stablecoins would be able to capture the benefits of a system without the need of any permissions, while also eliminating volatility. And what is most important, they will still adhere to the principles of digital assets and blockchain technology. People can rely on their immutability, stability, transparency and what is also important, they do not need an account in a traditional bank.