Bitcoin broke our hopes again. We’ve watched it rise to almost $20 000 and drop back to $3k. In July with Bitcoin growing to $14k everyone expected it would skyrocket to $1 M. Unfortunately, anew, we see the falling star.
So, what’s wrong about Bitcoin? Bitcoin is a decentralized currency, which means that no authority or government regulates it. And this is not possible ever to change. In terms of investment attractiveness, BTC is a two-end sword: while it seems to be a great investment opportunity, its high volatility makes it still tricky to rely on BTC.
With this in mind, different developers embarked on creating a brand-new kind of cryptocurrency – stablecoin. Backed with a certain less volatile asset, the coins can be maintained “stable”. Stablecoins’ value may be fixed to such fiat currencies as USD or EUR, or properties like gold. Sometimes, stablecoins rely on other cryptocurrencies like ETH or even not backed by anything and still manage to remain “stable”.
The most common and practical in terms of everyday usage are fiat-pegged stablecoins. The price of these cryptocurrencies is attached 1 to 1 to EUR, USD, or another real currency rate. It means that one such coin will always cost $1, for example. Given all the abovementioned, there is one question left: why is it better to use fiat-pegged stable coins compared to other cryptocurrencies?
First of all, digital currencies are notorious by the speed of transaction, their security, and low fees. However, most of them are incredibly volatile, and that’s a big deal for the mass adoption of cryptocurrencies. You can’t predict what price will be the next day. The cost of a stablecoin remains relatively the same, which makes it a more appealing investment since you don’t risk with losing everything in one night.
The second point is that fiat-backed coins are the most liquid assets among alternative types of stablecoins. Changing your tokens for gold may be perplexed as you need to go to the vault where those bars are stored to change your tokens.
So if the fiat-collateralized coins are that great why everybody is not using them already?
Well, like anything good, stablecoin has its own pitfall in terms of its usage.
Tether (USDT) is the most popular stablecoin known so far. USDT is used by traders to hedge their risks fast if BTC or another altcoin loses position. Tether claims to be backed 1 to 1 by real USD, which is nevertheless dubious. The point of every fiat-collateralized stable coin is to be entirely supported by actual USD reserves. However, Tether fails to confirm this fact as the enterprise hasn’t conducted a clear audit yet. Many experts suspect Tether of issuing more USDT than is collateralized by its USD reserves. In consequence, numerous new fiat-pegged stablecoins have emerged in the rush to take Tether’s place.
Another case is WaykiChain (WUSD). WUSD price is fixed 1 to 1 to the USD. However, its stability is controlled by other algorithms than actual fund reserves, like fiat-collateralized stable coins. The value of WUSD is regulated with the automated algorithm, which changes the supply volume to maintain its price. WUSD is working on the WaykiChain meaning that it is collateralized by WICC coin. Using mortgage rule, the system will sell stablecoin if the price falls below the pegged currency ($1). And more WUSD tokens will be released to the market provided that the value rises above the pegged currency. Also, mortgage rule requires 200% over-collateralization. Pledging 200% of WICC will allow keeping the price of WUSD steady. As it is built on the public blockchain, it’s 100% transparent and decentralized. Meaning that there will be no doubt about the transparency of fund reserves collateralizing this stablecoin.
WUSD is an improved version of Basis stablecoin, which failed to become a mainstream cryptocurrency due to complicated legal regulation of crypto assets. Basis has become one of the most well-funded stablecoin launches but was forced to close this highly promising project due to over-regulation of the securities market in the USA.
The concept of stablecoins seems to be an excellent alternative to traditional cryptocurrencies as they solve one of their main drawbacks – high volatility. While stablecoins are a great way to hedge risks, they also may become one step forward to the widespread adoption of cryptocurrencies.