What are the stablecoin, the latest cryptocurrency craze?


(Thomas White / Reuters)

There is a new form of cryptocurrency that is spreading among fans of digital money.

Unlike bitcoin, which saw its price swing wildly from $ 19,000 last year to its current level, which is around $ 6,200, this emerging class of cryptocurrency aims to maintain a stable price – just one dollar USA – at any time.

A cryptocurrency whose price never fluctuates might seem absurd, especially for base-level traders who want to benefit from the appreciation of a cryptocurrency. But many in the industry say that the rise of "stablecoins" was in fact fundamental for active investors and could represent a fundamental milestone for the future of money.

Bitcoin was initially accepted as a form of digital money that could be used to buy real goods and services. But in practice, currency volatility has made the purchase of anything much more complicated with it. In a first example of 2010, a programmer offered to pay two pizzas with 10,000 bitcoins. At that time, it amounted to about $ 30. At current prices, it would be equivalent to $ 62 million.

"I do not know if the price of that crypt will increase or decrease, but it will almost certainly not be the same as today," said Josh Fraser, co-founder of the cryptocurrency start-up Origin Protocol. "This introduces the problem [for] or the buyer or seller. . . as part of that transaction. "

That's why many in the industry now see the stablecoin as a great opportunity that could satisfy much of the original bitcoin promise as a medium of exchange.

In recent months, dozens of stablecoin projects have been launched or announced. With names like TrueUSD, Paxos, Havven and Dai, this new coin crop enjoys a total capitalization of over $ 2.3 billion, according to CoinMarketCap, which tracks the price of hundreds of cryptocurrencies.

In September, Gemini – the exchange of cryptocurrencies supported by the two twin entrepreneurs Cameron and Tyler Winklevoss – announced the Gemini Dollar; At the beginning of this month, the payments company Circle said its US dollar would become available on Coinbase, one of America's most important stock exchanges.

"The Stablecoins highlight some of the first potentials of the crypt," said Balaji Srinivasan, chief technology officer of Coinbase, "and make very small, very fast, very large, very international, very transparent and very automated payments possible."

Giving the digital properties of the US dollar reflects the next stage of evolution for money, supporters argue, because it takes the best features of a reserve currency – its reliability and universality – and combines it with the new technological capabilities of a cryptocurrency. It could not only allow faster payments that do not involve banks or the clunky automated Clearing House system, but it could also allow new types of financial apps and services that do not depend on partnerships with banks to function. Entirely new economic relationships could arise in the form of digital economic contracts that are strengthened. Although bitcoin has offered the same promise, experts say, it has been held back by technical challenges, pushing entrepreneurs to look for new approaches.

Many of the best known stablecoins operate on a simple idea: buyers pay a dollar to receive a digital token. The dollar is therefore kept in reserve. If a buyer subsequently decides to cash out, he can redeem his tokens for dollars with a one-to-one ratio. Buyers can also exchange tokens with dollars for other cryptocurrencies, such as bitcoin or ethereum, at various exchange rates. Some other stablecoin projects try to use algorithms to control the supply of money by adding and deleting coins so that the trading price always remains at one dollar.

The idea of ​​a cryptocurrency that is almost identical to the dollar is not new. In 2014, a company named Tether launched a currency with a unique proposition: for every Tether in circulation, there would be a US dollar to support it.

Tether has met an important need in the investor community, experts say. At a time of volatility in the cryptocurrency markets, Tether's stablecoin allowed investors to look for the relative safety of a dollar-like vehicle without actually fully collecting the cryptocurrency space, which could result in costly delays and costs. (The company did not respond to interview requests.)

Tether proved to be very popular: at the end of August, its market capitalization had reached $ 2.8 billion.

But all was not well: in recent weeks, Tether has been hit by a massive crisis of confidence. In some exchanges, Tether has started trading well below the dollar, which should not happen for a currency whose sole purpose is to maintain a solid peg. While the precise reasons for the slippage remain unclear, investors have engaged in a sell-off and Bitfinex – an important exchange that shares the same management as Tether – has removed hundreds of millions of Tether coins from circulation. In a month, Tether lost nearly $ 1 billion in its market capitalization.

Part of what's driving chaos is a long-standing suspicion among some Tether skeptics that the company is missing dollars to repay people in an effort to redeem their Tether tokens en masse. A related concern is that if there are more Tether cards in circulation than they really should be, and the Tether is traded for other cryptocurrencies, then perhaps the prices of these currencies could be overvalued, resulting in possible distortions and uncertainties in the broader market. . The halter has failed to reduce these fears; the company avoided by decision to open its books for a professional audit, despite stating that it is solvent.

Although Tether is still the most dominant stablecoin, chaos seems to help its rivals, according to an analysis of the CoinDesk publication, which has seen an increase in the market share of TrueUSD and US Dollar Coin in recent weeks.

The secrecy and uncertainty surrounding Tether has encouraged many other entrepreneurs to build opposing dollar bills that have "more transparency" than Tether, Fraser said.

Stablecoin critics say they can not work because they ignore what economists have been learning for hundreds of years.

Preston Byrne, a cryptocurrency entrepreneur, has defined the stablecoin as a "techno-magical idea", in particular, referring to projects that rely on algorithms to control the supply of money. Dictating the price of the currency and expecting the market to obey, rather than allowing the market to set the price of a currency, is backward, he said.

For a company that accumulates billions of dollars in the remote possibility that it will have to pay all at once, it's an expensive business model that does not scale, wrote Barry Eichengreen, a professor of economics at the University of California at Berkeley, in a recent editorial. Even keeping only a fraction of the necessary reserves is not a solution, he added, because it could lead to disaster in the event of a currency rush.

"All of this will be familiar to anyone who has even met a single study of speculative attacks on anchored exchange rates, or anyone who has taken a coffee with a central banker in emerging markets," he wrote.

However, some of the biggest players in the cryptocurrency industry insist that we will soon see not only digital tokens supported by US dollars, but also others that imitate the euro, the yen, the British pound and many others.

"I do not think people will call them stablecoin in five years," said Jeremy Allaire, Circle's CEO. "They will only be" on the Internet ".

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