Stablecoins: you may not have heard of them, but they could become the hot new commodity in the cryptocurrency world. Unlike a more traditional cryptocurrency or altcoin — which tend to float freely with a fluctuating market value — these tokens are stabilized by, say, following the United States dollar. This is supposed to help people use and trade the token with a better understanding of how its value will change.
“The next wave of the crypto market will be driven by real-world value and real-world use cases,” Tory Reiss, co-founder and head of partnerships at stablecoin platform TrustToken, tells Inverse. “This is the true excitement that traders are feeling around stablecoins in 2018: the promise of trillions of dollars of value being easily accessed and traded by anyone with a smartphone, anywhere in the world.”
We’re reporting on 19 predictions for 2019. This is #3.
Where the 2017 cryptocurrency surge featured a drove of startups fueled by “initial coin offerings,” the stablecoin will define 2019 for crypto.
Stablecoins on the Move
Stablecoins are seeing big jumps. Tether, the largest such token by market cap despite a credible academic study which found the token was used to rig markets, has barely dipped from its January surge. The token itself is still worth around one dollar, as its designed, but the total market cap surged from $451 million in October 2017 to a peak of $2.8 billion last month, only recently dipping to $1.9 billion but still ending the year on a high note.
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This is not just constrained to Tether. CoinDesk found that while the cryptocurrency market crashed in November, 24-hour trading volumes for stablecoins remained strong with USD-C reaching $25 million, briefly pushing it into the list of 50 largest tokens. TUSD also surged 234 percent in the same 24-hour period. A report from Diar noted that USD-C, TUSD, GUSD and PAX saw a 1,032 percent increase in on-chain transactions in November when compared with September.
The market tends to fall into three types, according to Reiss. There’s algorithmic stablecoins, which try to shift supplies to maintain a price with the dollar. There’s crypto-backed stablecoins, which absorb the shock of price fluctuations in a more traditional cryptocurrency, and fiat-backed tokens where the value is based on a currency like the dollar or euro.
“While algorithmic and crypto-collateralized stabilizing methods were celebrated by some in the industry as approaches that fulfill the original promise of fiat-free cryptocurrencies, it was ultimately the fiat-backed approach that created the biggest impact and has since ushered in the next wave of the industry,” Reiss says. “Why is it that the regulated, fiat-backed stablecoin model has received so much attention in 2018? It’s not the fact that the alternatives have not produced great results: no algorithmic stablecoin has successfully launched and maintained a stable price. The real excitement comes from the bigger implications of connecting real-world assets like U.S. dollars to the blockchain, and the trillions of dollars of liquidity that this opens up to traders around the world.”
Whether the market could repeat another version of the “initial coin offering” rush is unclear, in part because the experience of 2017 may have burned a number of investors. By February this year, 46 percent of the previous year’s ICOs had already failed, losing $233 million in value. There were 902 ICOs that year, and 142 of them failed in the funding stage.
Experts are also raising the alarm about fiat-backed stablecoins, which depend on the trust afforded by a central authority. Tether claims that every token is backed by a real dollar, but delays in professional audits have raised questions. Security researcher Tony Arcieri went one further in January, revealing that “I, and many others, suspect tether is being used to effectively counterfeit hundreds of millions of dollars of perceived value.” The issue taps into the question of expense surrounding stablecoins.
“To issue one dollar’s worth of Tether to you or me, the platform must attract one dollar of investment capital from you or me, and place it in a dollar bank account,” Barry Eichengreen, professor of economics at the University of California, Berkeley, wrote in The Guardian. “One of us then will have traded a perfectly liquid dollar, supported by the full faith and credit of the U.S. government, for a cryptocurrency with questionable backing that is awkward to use. This exchange may be attractive to money launderers and tax evaders, but not to others. In other words, it is not obvious that the model will scale, or that governments will let it.”
When Satoshi Nakamoto introduced bitcoin in 2008, it came with the promise of a decentralized cryptocurrency, free from central banks that could manipulate supply. It meant no middlemen, people exchanging value with lower barriers of entry. While stablecoins retain the “digital cash” benefits of bitcoin, fiat-backed assets seem to throw up the same issues that led to cryptocurrency’s creation in the first place.
19 Predictions for 2019: What Inverse Thinks
As the cryptocurrency market recovers from a serious crash over the course of the year, stablecoins show that developers are looking at the applications of the underlying technology beyond price speculation. Inverse predicts that, as the ICO defined 2018, stablecoins will define the next year in crypto, both in terms of trading volume and in the rise of new projects.
Related video: What is TrustToken?