Stablecoins

Why stablecoins are the future of crypto adoption

June 6, 2019

The frenzied times of ICOs bringing in millions may be over, but as crypto winter thaws, interest for real-world crypto applications is returning. Stablecoins pegged to local currencies and other types of asset-backed cryptocurrencies will play a key role in the future of crypto adoption.

What are stablecoins

Stablecoins are a type of cryptocurrency where the price is not determined by direct trading activity. Instead, it’s tied to the value of another asset. The most common stablecoins are pegged to national fiat currencies such as BitUSD, BitCNY, stable.PHP, sparkdex.HKD and DAO which are tied to US Dollar, Chinese Renminbi, Philippine Peso, Hong Kong Dollar and US Dollar respectively.

Besides the different assets the coins are linked to, there is another distinction to be made by looking at the way the peg is governed. There are two types of stablecoins: trusted and trustless.

Trusted and trustless stablecoins

When you buy a trusted stablecoin, it requires you to trust the central authority to 1) maintain the peg consistently and reliably, and 2) actually have the collateral which is supposed to underpin the peg. Trusted stablecoins involve a high degree of counterparty risk, perhaps best illustrated by USDT – a stablecoin maintained by Tether, who as of yet has still been unable to verify its collateral statements.

Trustless stablecoins on the other hand are not balanced and maintained by central entities. Instead, they rely on smart contracts and are collateralised with cryptocurrencies. In the case of stablecoins created on the Bitshares blockchain, the collateral is held in BTS. The MKR DAO collateral is held in Ethereum. Flexibility to absorb price fluctuations is built into the collateral as it has a predefined minimum ratio. For example, you need at least 1.75x the collateral value in crypto to create 1 BitUSD, although it is usually backed up by much more than that.

Real-world applications using stablecoins

It’s not the mechanics of trustless stablecoins that will drive the future of crypto adoption. It’s the real-world applications that people get excited about. Those will spark the true revolution of bankless digital money – accessible to everyone. Some examples include:

Bitspark

Our global cash-in cash-out payments network relies on stablecoins to effect transactions quicker and cheaper than any other traditional payment channel, such as bank transfers or retail services like Western Union. In any of the 100,000 locations affiliated with the Bitspark network, anyone can bring cash to convert into stablecoin and vice versa. From the Bitspark mobile app, the stablecoin can then be sent to someone else in a different country to be cashed out in the local currency, or exchanged for any of the other coins available on Bitspark. If you're an experienced crypto trader, you can also trade stablecoins on the SparkDEX.

For payments, stablecoins strike the perfect balance between all the benefits of cryptocurrency efficiency, accessibility and reliability combined with the stability and usability of national fiat currencies.

Okra

Okra is a provider of accessible and affordable energy in communities living in off-grid locations around the world. The community they serve in Palawan, a remote island in the Philippines, uses stablecoin stable.PHP to pay for their solar energy bills. This offers the isolated community access to a basic but essential utility.

Plus with the ability to turn cash into digital money they are now also connected to a global financial network – something that was previously inaccessible to the ‘unbanked’ community of Palawan.

Who is leading the race?

The future of crypto adoption certainly rests with stablecoins, but there is no one particular project or organisation leading the race in driving adoption of a single stablecoin. However, that may change when mainstream tech companies with a powerful combination of resources and scale move into the stablecoin space.

For example, in late 2018 reports surfaced that Facebook was making a stablecoin for WhatsApp users, which could be used for money transfers made within the messaging app. If it is indeed true, it would be in stark contrast with Facebook’s blanket ban approach regarding all things crypto and ICO.

Update: Since publishing this article, Facebook provided more information on its crypto project called Libra.

On the other hand, there is also every chance that stablecoin adoption will be driven by the necessity of more reliable currencies in developing countries. Citizens living with hyperinflation in countries such as Venezuela, Zimbabwe and Angola would more than likely welcome and embrace a digital coin they can actually count on.

Where and how stablecoins will reach critical mass remains to be seen, but that they will is practically certain. As the world becomes more globally interconnected, we simply need a reliable, stable, and digital currency everyone has access to.

More on stablecoins:

Beginners Guide To Sending Money With Bitcoin And Stablecoins

Asia Ripe For Stablecoin Adoption In 2019

Top FAQs On Stablecoins

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