The cryptocurrency market is going through a process of considerable maturing. While the price remains low, compared against all-time highs, development continues behind the scenes. Critical instruments for a financial market are being introduced, and even created, while the market moves pointedly sideways. Chief among these instruments is the stablecoin – a much needed source of both liquidity and safety.
Stablecoins allow investors to remove their funds from the volatility of the market, without going through the onerous process of converting them back to fiat. The introduction of industry-first stablecoin Tether made a significant impact on the market. Where Bitcoin was once the de-facto store of value, users could now peg their investment to the US dollar in times of crisis. However, Tether’s less-than-transparent operating system led to a rise of alternative stablecoins in late 2018.
Stablecoin Price Wars
Many of the major players in the cryptocurrency sphere have introduced their own stablecoins over the course of 2018. Gemini, Circle and Paxos are all competing to displace Tether as the stablecoin of choice – even going so far as to incentivize their use. Although all are ostensibly pegged to the US Dollar through funds held in reserve, Gemini and Paxos both have offered over-the-counter (OTC) discounts for large investors. At as much as 1%, these discounts make the stablecoins very appealing for entities already looking to enter the space.
These discounts may seem bizarre to the average investor, or even a potentially malicious action. However, in effect, Gemini and Paxos are spending money to provide these discounts in the hopes of generating increased activity. It’s no different than allocating an amount for advertising, albeit in a non-conventional fashion. The tactic is also working, with Tether’s dominance over the stablecoin market steadily decreasing over time.
The Necessary Evolution of Stablecoins
Beyond the need for stablecoins in the first place, there are several advancements that need to be made in the near future. Paxos offers one of these advancements already – the ability to easily swap PAX for USD. The usual process for purchasing cryptocurrency directly is not fast – generally taking several days to complete. The ability to rapidly transfer in and out of the cryptocurrency space allows for greater investment flexibility.
Additionally, pegging every stablecoin to the US Dollar makes the decentralized market strangely dependent on the US economy. As the stablecoin market grows, we are beginning to see expansion into other fiat currencies. Japan’s Yen and the Euro are both pegged to new stablecoins, potentially introducing entire new markets to the industry. Even more inventive, some stablecoins are working to peg themselves without the use of fiat currency at all. MakerDAO uses a complex system to keep their currency at a stable price, providing its own reserve supply of cryptocurrency through a delicate balancing act. The days of cryptocurrency being completely decoupled from the traditional financial world are gone, but stablecoins are doing their part to decrease the dangerous volatility of the market.
Article By: Adam Stone