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Clemen Chiang

Ph.D. | CEO | Investor | FinTech in Stocks | Blockchain in Cryptos | Singapore

Does The Stable Coin Have A Secure Place In Cryptocurrency Right Now? 11 Oct 2018

Does The Stable Coin Have A Secure Place In Cryptocurrency Right Now?

Stable coins are slowly creeping into the cryptocurrency market and the concept appears to be here to stay. There are some cryptocurrency enthusiasts and writers that herald the stable coin as the future for secure, collateralized trading. Forbes even ran an article declaring it as “the holy grail of cryptocurrency”. However, we have to wonder if some supporters are getting a little ahead of themselves. This “stable” option has potential, but is it really the perfect product that traders have been waiting for?

Stability is a word that will gain a lot of interest from traders and regulators.
One of the biggest issues with cryptocurrency is instability. Massive fluctuations in value hold the industry back. New investors walk away from the risk and regulators issue more warnings. Stability is the answer. The industry needs something with a more solid foundation to get past regulators and appeal to new investors, rather than just whales. But, in what form? An unstable market surely needs a stable coin in order to regain a little balance and trust.

Supporters of the stable coin highlight the following benefits:

  1. A clear value via a collateralized system.
  2. Strong pairing with liquid assets and major currencies.
  3. Improved securities and regulations.

The idea here is that stable coins offer this assurance by creating a value that is stable against an equivalent, more standard currency. There are new stable coins tied to the dollar, euro and other major currencies. The list is steadily growing, as more and more companies look to profit from this new solution. One well- known example that some traders have turned to is Tether. In fact, this is one of top performing cryptocurrencies for September 2018. Then there is the Gemini dollar, which is tied one-to-one with the dollar. Gemini, in particular, is a potential game changer because of the company’s determination to improve compliance and surveillance programs.

Many companies are saying the right things about this collateralized system, but it has some issues right now. They include:

  1. the expense to the trader.
  2. disputes on the true links and value of the pairing.
  3. problems with centralization.
  4. the lack of currencies involved.

A dollar’s worth of a questionable new stable coin costs an actual dollar.
That means risking a fully liquid asset for something unverified. This isn’t so bad with small amounts, but are traders really willing to gamble larger amounts on this “stable” pairing? This raises additional questions over the role of whales in all this. How will their vast shares of these new stables coins effect fluctuations in value?

Stable coin companies don’t yet fit the profile of the transparent, decentralized provider that crypto-traders are after.

This is a major obstacle for all o these new companies and the future of stable coins. Cryptocurrency users want DAOs. These decentralized autonomous organizations provide the systems and methods that users wanted when turning away from traditional approaches. More importantly, cryptocurrency users want a decentralized system with transparency and a sense of trust. Tether fails to provide that right now, especially after recent issues with the Paradise Papers. They are also a centralized system.

Then there is this focus on the dollar.
The all-mighty dollar is an important player in global finance, but it crypto-banks can’t develop via dollar trading alone. Many cryptocurrency advocates will try and sell the potential of the stable coin based on this pairing with the US dollar. There are a number of currencies tied to stable coins right now, but not enough of them. Where does the Yen and the Pound fit into all of this? When we consider the current fear in China over cryptocurrency and its bans, we may not see Yuan links anytime soon either.

Can these stable coins really offer the stability that crypto-banking needs right now?
The idea of the stable coin is great in theory. There is no doubt that the cryptocurrency industry needs a little stability to evolve. Mass adoption of cryptocurrency across the world may be achievable with viable pairings. However, that stability isn’t quite there yet. There are too many issues over validity and centralization for mass adoption right now. The lack of links with other major currencies is another stumbling block. As soon as transparent DAOs can offer a truly stable, secure product, the stable coin may finally thrive.

References:
1. https://www.theguardian.com/technology/2018/sep/11/stable-coins-bitcoin-cryptocurrencies-tether
2. https://cointelegraph.com/news/two-us-audited-stablecoins-debut-experts-see-massive-impact-on-crypto-market
3. https://www.forbes.com/sites/shermanlee/2018/03/12/explaining-stable-coins-the-holy-grail-of-crytpocurrency/#101e3b244fc6

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