As we get closer to our next big launch, we’d like to start a conversation around stablecoins.
We all like to imagine a world where cryptocurrencies are more popular than fiat. Where businesses will exchange goods for coins, employees are paid with smart contracts and blockchain transactions are just an everyday norm. But this won’t happen without stablecoins which are cryptocurrencies that are price-stable with less volatility. At the moment, cryptocurrencies are not a good store of value due to their fluctuating prices therefore a good stablecoin is in demand more than ever.
Stablecoins are typically pegged to fiat, assets or a basket of goods. The pegging mechanism itself determines how fruitful a stablecoin really is.Therefore, a stablecoin should have an effective peg that allows it to remain price-stable under high market pressure.The three major factors that affect the peg mechanism include decentralization, collateral, and transparency.
Cryptocurrencies are decentralized, but a stablecoin pegged to any fiat will need to aggregate real-world market data into the blockchain to monitor the price, therefore becoming less decentralized. A fully decentralized peg protocol is modeled after the Schelling Point scheme, whereby users on the network are incentivized to vote on the exchange rate of the coin. However, the Schelling Point scheme is not perfect and can be manipulated in favor of users who hold high amounts of coins. In conclusion, a peg does not have to be 100% decentralized to be effective as it is more important to maintain reliable and trusted price data.
Stablecoins need to be price-robust in order to withstand market pressures. A majority of stablecoins may use collateral to protect and backup the price of a peg. This means that a stablecoin does not collapse to zero when the market takes a nosedive, this is because there is liquidity available to absorb the selling pressure. Therefore, the type of collateral used to backup the coin is vital because it will be deemed stable and not fluctuate in price.
A peg mechanism does not need to be highly complex and promise to save the world. If stablecoins are to replace traditional currency, then there needs to be trust established through a fair governance model that allows users to participate in the peg protocol. The tether market share is proof that there is enough demand for safely collateralized and price-stable cryptocurrencies. Stablecoin technology is still new and we need a variety of of peg mechanisms available for us to test the best solution.