Stablecoins remain one of the most important facets of the cryptoasset industry. While the dominant player in the market, Tether (USDT), is yet to relinquish its crown as the leading stablecoin despite regulatory and media scrutiny, the sector looks to be one of the key battlegrounds for industry heavyweights in coming years.
The space, however, is becoming increasingly complex.
While there are several distinct forms which keep evolving, they all carry the name “stablecoin” despite their different uses, goals and paths ahead.
One common thread that perhaps unites most, if not all, stablecoins is that they offer the promise of an entry point into the cryptoasset ecosystem and potentially to entirely new areas of finance.
Types of Stablecoin
There are many types of stablecoin, including more niche, commodity-backed stablecoins such as gold- and diamond-backed coins. Broadly speaking, however, there are three types of stablecoin that capture the vast majority of the market share.
Fiat-collateralized.The simplest of the three, these stablecoins that are backed by fiat currencies such as the US dollar - usually on a 1:1 basis.
The most prominent players in the stablecoin market - Tether, TrueUSD, Gemini Dollar, PAX, USDC and USDK are all backed one-to-one by USD.
These offer a simple to understand on-ramp into crypto markets, allowing investors to move in and out of crypto ecosystem in a straightforward way.
Crypto-collateralized.These stablecoins are backed by other cryptocurrencies, such as ether (ETH).
To mitigate the (sometimes extreme) volatility in the prices of cryptoassets, these coins are often over-collateralized—meaning that there is more than the value of the coin backing it at the time.
They can thus withstand swings in price as they can draw on the extra collateral if the value of the underlying cryptoasset drops. One popular example is Dai, which is backed by ETH locked in smart contracts.
Non-collateralized. These stablecoins have a more complex structure.
Algorithmically controlled, these coins, such as Ampleforth, expand and contract their supply in response to varying demand.
In theory, this means that they can keep their price constant, in a mechanism similar to the way by which central banks attempt to with their fiat currencies.
The various types of stablecoins all have their own unique value proposition, adoption challenges and regulatory hurdles to overcome.
One dramatic newcomer to the space, however, has potentially opened a Pandora’s Box of regulatory problems.
Regulatory obstacles and Libra
While the stablecoin market has grown enormously in the last two years, regulatory scrutiny has also amped up.
In addition to the ongoing regulatory scrutiny of Tether, the announcement of Facebook’s Libra stablecoin has prompted a considerable response from regulators in the US and Europe.
But it remains a real questions as to whether Libra will make it to the market, given the recent developments such as Calibra CEO David Marcus recently facing intense scrutiny during the congressional hearings to examine the Libra blockchain and cryptocurrency, France forming a G7 (Group of 7) Task Force to address their regulatory concerns, and public opinion of Facebook in the West at an all-time low.
What many forget however, is that there are existing, regulation-compliant and audited stablecoins that offer an entry point into the crypto ecosystem.
The development of stablecoins
In rough terms, stablecoins can be conceptualized into three stages, all of which can co-exist.
Stablecoins 1.0: A simple way for external funds to enter crypto markets and keep one’s cryptoassets stable.
Stablecoins 2.0: A highly-efficient payment tool to function as a means of expediting the banking process.
Dependent on trust among banks and without being based on the digital fiat of a government’s central bank, these coins gained traction with the announced stablecoin plans from JPMorgan and Mizuho bank.
While they may greatly increase efficiencies within the banking system, these kinds of coins are unlikely to herald a new influx of users and money into crypto markets.
Stablecoins 3.0: This is where stablecoins may act as a cornerstone of a potentially enormous new market: DeFi - Decentralized Finance.
Aiming to decentralize much of finance such as lending, debt platforms and asset management, DeFi is increasingly turning to stablecoins as a means of interacting with their services.
Dharma, for example, utilizes stablecoins to facilitate peer-to-peer lending and avoid market volatility. Stablecoins in this way have a more important function as they offer a way to mitigate the volatility of bitcoin and other cryptoassets.
USDK, a stablecoin recently launched by a blockchain technology company OKLink in June, has credentials when it comes to those goals mentioned above.
Developed by OKLink and issued by Prime Trust, a trust company registered in Nevada, USA, USDK are backed by USD escrowed independently by Prime Trust.
USDK is currently listed on leading exchanges OKEx and Bitfinex.
In terms of audits, USDK is audited by an independent audit firm, Armanino, one of the leading professional service firms in the US.
With bank audit reports issued regularly by Armanino, and smart contract audits performed by third-party companies like Certik and Slowmist, USDK offers a stable and secure entry point into the cryptoasset ecosystem and is regulated under the Banking Regulatory Agency of Nevada.
USDK has started to expand public chain partners for financial applications cooperation, and looks set to be a major player with respect to Stablecoin “types” 1.0 and 3.0. In particular, as DeFi gains traction, with more and more attention being drawn to peer-to-peer finance, the role of a verifiably backed, stable, and secure asset such as USDK will likely grow in importance.
About the author
James is a crypto enthusiast and freelance writer from London who got into the space in 2016. Excited by the way crypto is intersecting with traditional finance, James enjoys tennis and long-distance running when he's not trading crypto.
The content of this article does not reflect the official opinion of FutureCFO. Responsibility for the information and views expressed in this article lies entirely with the author.