Are Stablecoins the Answer to Industry-Stifling Market Volatility?

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This is the latest post by regular guest writer Eddie Mitchell. Eddie is a seasoned writer on all things Blockchain and crypto and we’re delighted that he has agreed to become a regular contributor to Rhetoriq.

Rocky Road

What propelled the technology into mainstream consciousness was the speculative market value; eventually, bitcoin and other cryptocurrencies began to wind down from their historic highs earlier this year, and as the dust cleared, it revealed a significant number of blockchain startups ready to take the world by storm.

But the enduring swings of highs and lows are making for a hindered blockchain enterprise ecosystem, one constantly challenged by bumpy crypto-economics. The industry continues upstream and is slowly but surely establishing new heights aside the treacherous markets; now the discussion has moved onto facilitating a healthy economic environment for blockchain enterprises through the use of stablecoins.

Stablecoins

Often cited as the ‘Holy grail’ of cryptocurrency, stablecoins are digital currencies that have their values pegged to another stable/real-world asset like gold. Presently, there are many stablecoins in existence that have proven popular for those seeking to hedge their investments as a more secure store of value; bitcoin is often challenged as being insufficient in this regard.

Stablecoins run against the popular theme of true decentralization, a core ethos within the cryptocurrency community. A majority of stablecoins are tied to an external entity, which brings about uncertainty and skepticism, though it can be argued that this largely present in attitudes toward traditional speculative cryptocurrencies, minus the real-world asset value.

Though in the world of blockchain technologies, even the stablecoin side of the industry is wrought with contentious issues that are another cause for mass-adoption to be postponed; if Bitcoin is the granddaddy of cryptocurrencies, then Tether (USDT) could be considered the same for stablecoins.

Tether (USDT)

If you are in anyway familiar with the cryptocurrency space, it is extremely likely you have spotted USDT, a stablecoin that was once pegged to the USD at 1:1 (more on that in a moment).

Tether presently sits in the top ten cryptocurrencies on CoinMarketCap, with a circulating supply of 1.7 billion USD and a total supply of 2.5 billion USDT; it has been a controversial token in the industry for some time especially as it issues gigantic sums of USDT into the crypto-ecosystem. Some see this as suspicious, some say look at the evidence backing the firm’s issuance.

As written on to the official website: “Tether Platform currencies are 100% backed by actual fiat currency assets in our reserve account. Tethers are redeemable and exchangeable pursuant to Tether Limited’s terms of service.”

The Tether website also offers a transparency page and updates via a ‘Proof of funds’ document that details its holdings as part of its commitment to prove that the “Tether Platform is fully reserved when the sum of all tethers in circulation is less than or equal to the balance of fiat currency held in our reserve.”

Controversies

In 2017 Bloomberg was already gunning for Tether questioning the integrity of the firm, digging at connections between them, Puerto Rican bank accounts and the Paradise Papers.

Despite the reputation it was getting for itself, Tether has remained a powerful market force, although very recently, the ‘untethering’ took place, rocking crypto-investor and industry confidence once more.

This is due to Bitfinex, the largest USD to BTC exchange in the world, having troubles with its bank based in Puerto Rico. Additionally, 320 million USD of USDT had been removed from circulation, which is reported to be only possible via the redemption process of converting USDT to USD directly through Tether Limited.

It was then surprising to see on October 15th, USDT losing its peg and drop to 0.925 USD, bringing the validity of the redemption process into the debate.

Volatility vs. Startups

As we know, if the value of bitcoin shifts then so does the rest of the market. Here is a question that may put the issue into perspective: Would you attempt to start a business in a country with an economy as volatile as bitcoin?

The answer is likely no, and therefore it is more likely that you would seek concrete financial foundations.

Conversations that circle these questions are taking place at governmental levels, indicating some concern. In September 2018, UK Member of Parliament (MP) Lord Bates was questioned with regard to the impacts of crypto-market decline on the bustling UK blockchain industry, to which he answered:

“The Government has not made a formal assessment of any potential implications of recent changes in the value of cryptocurrencies. However, the Government continues to monitor developments in the cryptocurrency market”.

Cause and Effect

The ebbs and flows of traditional stock markets can influence the outcome of success for individual businesses in a couple of ways. Firstly, market health defines investor attitudes, when the value rises, so does investor confidence, wealth gain, and increased consumer spending.

Furthermore, in traditional markets, hedging is a risk-reducing financial strategy that protects against volatility and stablecoins have the potential to be a hedging solution for the blockchain industry. But as we have seen from Tether, the most widely used stablecoin in the world, this new frontier has some way to go with regards to building trust.

There are numerous stablecoin projects on the go at present that come in various forms and in a rather timely manner, Coinbase recently announced the listing of its very own stablecoin USDC, originally launched by Circle with Coinbase being credited now as a co-founder.

It is certainly a sign of the times; there is a growing demand for stablecoins, but now debate as to whether or not they are a solution to ever-increasing to volatility is coming to the forefront.

As demand grows, so do enterprises seeking to be the stablecoin of choice for the industry; since 2014 there have been over 70 stablecoins created which are yet to be proven as a solid backbone for blockchain enterprises, whose success depends upon demonstrable worth, utility, usability, and ability to weather the storms of cryptocurrency market crashes.

If we are unsure as to whether or not stablecoins are the answer now, it can be presumed that we most certainly will in 2019.

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