Cryptocurrency was invented and designed to provide numerous benefits for global private and institutional clients, to free people from the burden of banking systems and to create a new financial ecosystem.
The underlying technology, blockchain, can indeed be considered one of the most significant technological advancements of the 21st century, as it provided the groundwork to establish a new kind of money: digital currency. However, after a few years of overhyped crypto market mayhem, countless fraudulent projects and questionable vectors of development, it became evident: global acceptance could not be achieved yet. The industry lacked something vital. Reality had proved that unbacked digital currencies couldn’t lead to a better era. From the ashes of failed investors’ expectations a new cryptocurrency asset class has been born: the stablecoin.
A path to digital age money
In redefining the way of economic interactions, we have to realize one thing: changes and inventions are driven not only by wants, but mostly by needs. Money has always been a sort of development thing, facing constant reshaping along with humanity’s technological advancements. Since ancient times, people have tried using different assets to create a unique measure of value, from commodity currencies like gold and silver in 3,000 B.C. to representative currencies such as the gold standard taking hold in the 1700s.
It’s worth mentioning that an extensive rise in production led to search and expansion to new markets and, as a result, to international trade growth. Any national currency pegged to a specific, fixed gold amount became a universal and convenient payment mechanism. The introduction of this approach helped to find an easy solution for merchandise trade balance calculations for each of the world’s countries.
Later, fiat currencies — such as the United States dollar, Japanese yen or euro — issued by national bodies paved the way for the financial system’s further development. The digital age came next. The idea behind electronic money was introduced much earlier than we think. Numerous discussions had been in the air since the Internet went mainstream back in the 90s, long before crypto assets stepped up in 2009 with the birth of the Bitcoin (BTC).
With speeding tech advancement, the 21st century has seen the rising need to solve the long-term issues of financial systems. And newly introduced blockchain technology was just the right cure, aiming to provide benefits and disrupt the centuries-old powerhouse of the classical banking institution to give people a more transparent and faster way to engage in the financial field, perform transactions and use money freely.
Overcoming digital asset issues
The short but exciting history of cryptocurrencies draws several conclusions: the lack of reliability and real trust, the uncertainty of global regulations and pressure from legislative governmental bodies are among the main reasons why digital assets have not yet seen worldwide adoption. Stablecoins have been developed to change this situation.
The risks are too high for top modern businesses and consumers to use crypto instead of fiat money in many areas. It’s simply not a casual thing yet. Or is it?
For example, paying salary in Bitcoin represents more of a lottery game than a real payment, as the salary’s purchasing power will fluctuate along with the number one cryptocurrency’s exchange rate. The fact is, with the most negative scenario in place, you may find that you’re fresh out of money. Buying your favorite espresso at Starbucks with crypto on a daily basis can be hard on your wallet at some points due to price fluctuations. Besides, high volatility makes blockchain lending, derivatives, forecast markets and other long-term ventures that require price stability impossible.
The idea and subsequent decision have long been in the air, as the concept seems quite adequate and straightforward: to create specific digital assets that are free of the burden of price fluctuations tied to more reliable assets like the U.S. dollar, oil, gold, etc.
What are the qualities of an ideal stablecoin? The perfect financial instrument should possess several qualities:
- Be a convenient payment instrument.
- Serve as a value measure.
- Can accumulate value.
- Withstand significant market volatility.
- Maintain low support costs.
- Provide decent scalability.
- Support privacy and decentralization.
- Be flexible enough to adapt to changing global and local regulations.
- Provide transparency for trading and arbitrage transactions.
Such features can ensure the maximum acceptance of stablecoins in the modern world full of regulations and governmental pressure.
The upcoming market vector
Last year was called the year of stablecoins, and the 2019–2020 timeline is supposed to be a turning point for stablecoin ecosystems, with growing implementation and acceptance worldwide.
Perhaps we will come to witness a lot of different experiments before they are actively accepted in the market. Spending on blockchain solutions will definitely grow. According to Statista, in 2022, U.S. spending on blockchain solutions is projected to reach about $4.2 billion, making it the largest regional spender on such solutions.
The numerous regulations issued by countries worldwide have created specific conditions that will shape the industry during the next few years. Only companies that can research and carefully follow the global regulatory environment will launch their products successfully.
Compared to more traditional crypto, the volatility of stablecoins is much lower because the price is directly dependent on the rate of the real asset. This creates new opportunities in the development of the cryptocurrency industry and digital assets at large.
Moreover, stablecoins have a real chance to be used as a global currency that can’t be subject to traditional market disasters. This kind of digital currency is not fractionally reserved. Blockchain assets are audited on demand and the risk level is significantly lower. That’s the main difference from other derivatives that have created financial crises over the last couple of centuries, such as Tulip mania, the South Sea bubble, the Great Depression, Silver Thursday, the Mexican default, etc. The list can go on.
However, existing stablecoins have various drawbacks that do not reassure market adopters of the simple fact that it’s the inevitable market future. Crafting a product that can ultimately win in a market race in an environment of fierce competition among a few hundred existing projects is nearly a Mission Impossible kind of task.
Becoming an ultimate cryptocurrency trend
Since the beginning of 2017, about 200 teams worldwide have announced stablecoin developments, but many projects failed to implement them in the end. Nowadays, less than 30% of the stablecoins ever released continue to exist, according to data collected by Blockdata.
The very concept of stablecoins represents a fusion of the best cryptocurrency features and the ones fiat possess. They combine on-demand accessibility and irreversible, immutable transactions with constant and understandable value tied to a traditional currency that everybody is used to. Nowadays, it has become evident that long-term perspectives on such assets are huge. How did humanity reach this milestone? We offer you a journey into an exciting crypto world to enrich your knowledge and share our vision: stablecoins represent not a trend, but a next evolutionary step for the finance industry at large.
Moreover, during the coronavirus outbreak, interest in digital currencies has accelerated the whole industry’s progress as the demand for a digital dollar and a digital euro has risen dramatically. In addition, it has caused a drastic increase in the use of financial technology applications in Europe and the whole working world as more and more workers now need to operate online. Digital money is safe to use to provide remote payments — a quality one would not think of as more than just a convenience before — and stablecoins are the best tools that can be taken out of this particular box.
Digital currencies now are being regarded not as trendy, geeky stuff, but as a safer way to perform financial operations, and even more, to provide a new type of layer for the foundation of the future financial system.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Gregory Klumov is a stablecoin expert whose insights and opinions appear regularly in numerous international publications. He is the founder and CEO of Stasis, a technology provider that issues the most widely used euro-backed stablecoins with a high transparency standard in the digital-asset industry.