Will cryptocurrencies ever become much more than speculative resources? If they do, the key will be a new type of digital currency designed to keep a constant price. At least, this is what a growing number of developers in the cryptic world seem to believe.
We are in the middle of a "Cambrian explosion" of such projects, says Garrick Hileman, head of research for Blockchain, a cryptocurrency services company. According to a survey that Hileman published this week, the number of what are called stablecoin has gone from a handful to nearly 60 in the last 18 months, and more than a dozen more should be launched in the near future. Hileman says the stoverate race speaks of a growing understanding that the volatility of cryptocurrencies like Bitcoin and Ethereum "will be a problem" for some of the most sought-after blockchain applications, such as payments, loans and insurance. And he says it reflects the hypothesis that non-volatile digital currencies can form an "infrastructure level" that could greatly expand the global cryptocurrency user base.
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Cryptocurrency is often launched as a new form of money that will benefit people who do not have access to a bank account or a stable national currency. Another popular prediction among enthusiasts is that smart contracts, computer programs with blockchains that automatically move cryptocurrency between users based on agreed conditions, will revolutionize the way we do business online.
But so far payment applications have not managed to get much traction, and a good deal of exuberance last year on the future of decentralized applications based on smart-contract, if you prefer, has been replaced by the uncertainty that Ethereum is similar platforms can live up to the advertising campaign. Ethereum and other currencies have wildly fluctuated in price, and this could very well be one of the reasons why applications based on encrypted payments have not seen wider adoption.
If the goal is to expand the user base, it is important to be clear about what we mean by "stablecoin". The term can be used to refer to some very different concepts. Tether, a popular stablecoin that is supposedly backed by US dollars in a bank account, has been around for years. A useful tool for operators who want to safely park their earnings in other investments in cryptocurrency without having to convert money into fiat money, Tether has inspired a series of imitations.
According to the Hileman report, almost 60% of the $ 350 million that venture capitalists invested in stablecoin projects went towards approaches that are not based on banks and thus promise to be more decentralized and accessible. Some use cryptocurrency instead of legal currency as collateral, relying on smart contracts to manage the volatility of the collateral. But most of this funding has supported coins to be launched commonly called "algorithmic central banks". A coin like that would not use collateral at all, and would instead use software to increase and decrease its offer in order to maintain its price.
Critics doubt that these more complicated stablecoins can hold their pegs in the long run. The systems also raise complicated new legal issues, especially considering that many rely on an element of market manipulation to maintain price stability, says Hileman. "These are the first times, not only from the technological point of view, but from the regulatory side," he says. "Trying to make too many predictions about where this situation will end is dangerous at this stage."