There is increasing belief that stablecoins represent a key step towards the widespread adoption of blockchain technology. Facebook’s announcement last week of Project Libra and JPMorgan’s JPMCoin initiative are just two recent examples of major companies working on stablecoin projects.
Because of this flurry of activity, we decided to take a deeper look at the state of the stablecoin market. We compiled our research into a free 31 page report which you can download on the Blockdata website.
A form of cryptocurrency that is collateralized to the value of an underlying asset. Its value is intended to maintain a constant value relative to the underlying asset.
Before we go into some of the background on stablecoins, here are some of our main findings:
- More than half of the 66 live stablecoins were announced in 2018.
- Since the start of 2017, 134 stablecoin projects have been announced but are still in development. We expect a majority of these to be released over the next 18 months.
- 50% of the active stablecoin projects are developed on the Ethereum network(that is, those with a public release). Their use of the ERC-20 token standard allows for easy interoperability with other Ethereum-compatible software and hardware wallets. This mirrors the pattern of Ethereum being the most popular development platform for blockchain projects.
- Stablecoins backed by commodities like gold and silver have the highest failure rate.
- Out of the 66 active stablecoin projects, only 25 of them are externally funded. With the majority of top investors coming from the United States.
- Major limitations to stablecoin adoption are due to regulatory restraints (as can be seen with the Basis case study on slide 27), centralization requirements, volatility of commodity and crypto-backed collateral, and the lack of trust in the issuing authority.
What are they and why do they exist?
A stablecoin is a form of cryptocurrency that is collateralized to the value of an underlying asset. As indicated by its name, stablecoins are intended to maintain a constant value relative to some other asset.
Stablecoins are designed to address a number of issues with cryptocurrencies, the most significant being price volatility. This chart shows that popular cryptocurrencies, even those with the biggest market cap, can have daily price swings up to 160%.
This characteristic of the crypto market means that stablecoins allow investors to dip in and out of the market, reducing their exposure to this volatility. Stablecoins also provide exchanges with liquidity, which allows the cryptocurrencies on exchanges to be converted quickly without drastically affecting the price (easier flow of money throughout the exchange).
Stablecoins also represent an opportunity for payments and transfers with very low fees between individuals and businesses. We wrote about the savings merchants can achieve with blockchain payments, as well as a piece on remittance platforms that use blockchain.
There are three broad categories of stablecoins
asset-backed off-chain: stablecoins whose price is pegged to fiat currencies like the US dollar or euro; commodities like gold; or other real-world assets. The ‘off-chain’ part of this name refers to the value being attached to collateral that exists off-chain. The biggest names in this category are all fiat-backed: USDT from Tether, with a daily trading volume that regularly exceeds $10billion, Coinbase’s USDCoin, TrueUSD from TrustToken, and GUSD from Gemini. In case you were wondering, fiat literally means ‘let it be done’, and refers to currency whose value is established by government decree, rather than direct 1:1 backing by an asset such as gold or silver. Supplies of fiat currency are determined by the central bank.
asset-backed on-chain: stablecoins that are backed by other cryptocurrencies (including other stablecoins in the case of Huobi’s HUSD).
algorithmic: a combination of smart contracts and algorithms adjust the supply of the coins in order to maintain price equilibrium. An interesting example of such a project was Basis. Launched in August 2017, Basis intended to maintain a stable price by incentivizing traders to buy and sell Basis tokens in response to changes in demand. This would be achieved through on-chain auctions of ‘bond’ and ‘share’ tokens. After raising $133million in funds, Basis was unable to overcome the obstacle of the SEC’s likely classification of these bond and share tokens as securities. This meant severe restrictions would be imposed on these auctions, weakening the stabilization method, among a host of other issues. As a result, CEO Nader Al-Naji elected to return the funds to their investors and shutter the project.
What next for stablecoins?
There is clearly a big appetite for stablecoin projects, with over 100 currently in development. With the fifth largest company in the world joining the party, it seems as though stablecoins are here to stay if they can withstand scrutiny from regulators and lawmakers. But as things go with crypto, don’t expect this road to be without bumps.
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