How Stablecoin is different from Bitcoin?
The main purpose of stablecoin is to minimize the volatility of the price. Stablecoins do this by pegging itself to the value of any fiat currency, cryptocurrency or trade commodities or any other commodities. While Bitcoin is very well-known for its volatile nature.
Stablecoin is said to be introduced by Robert Sams in 2014 with a paper titled “A Note on Cryptocurrency Stabilization: Seigniorage Shares.” Robert has introduced a basic mechanism where setting a peg for a new coin, and then monitor the price on the exchange can be done algorithmically, in a way that is transparent and auditable by everyone.
One of the drawbacks for cryptocurrencies is its volatility in prices due to their relatively small market cap. Such drawback will hinder its adoption for everyday transaction in real life. Stablecoin offer an alternative for people to transact with each other without the volatility in price, while fulfilling the need for fast and cheap transaction.
Lael Brainard said “Stablecoins aspire to achieve the functions of traditional money without relying on confidence in an issuer — such as a central bank — to stand behind the ‘money.’”
Traditional Asset-Backed Stablecoin
This is the first and the most popular type of stablecoin at the moment. If the stablecoin is peg to the US dollar, then for every issued stablecoin mean there is an equivalent $1 held in a bank account.
This type of stablecoin hold its value by the market confidence that the total number of coins issued are backed by its underlying asset held. The mechanism behind this type of stablecoin is easy to understand and create, however, the risk is that such coins is often related to trust and centralization.
One of the notable examples for this type of coin is Tether (USDT), which have a market capitalization of over $1.75 billion, and this is the most widely adopted stablecoin today. USDT is pegged to US dollar which mean 1 Tether is equal to $1.
Crypto Asset-Backed Stablecoin
For a crypto-backed stablecoin, the collateral will be a cryptocurrency such as Bitcoin and Ether. Compare to a traditional asset-backed stablecoin, a crypto-backed stablecoin is more decentralized as the crypto assets being held as collateral can be locked in smart contracts.
One of the most popular of this type of stablecoin is called Dai, which is created by MakerDAO. The face value of Dai is pegged to the US dollar, but it is collateralized by Ethereum.
Prospect for Stablecoin
There has been a growing interest for stablecoin over the recent years, with increasing number of institutions are looking to creating their own stablecoin such as Facebook’s Libra and JPM coin by JPMorgan. We are yet to see which institution can win the race by becoming the first to achieve mainstream adoption.
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