All about Stablecoin: The new kid on the block(chain)

Cryptocurrencies are having their moment of reckoning. Valuations have consistently declined over the past few quarters, validating naysayers like Warren Buffett, who famously described Bitcoin as “rat poison”.

But recent evidence suggests that Buffett’s Berkshire Hathaway has invested in StoneCo, a Brazilian firm that is reportedly in talks to open its platform to trade in Bitcoin and Ethereum.

Regulators, however, argue that the anonymity afforded by virtual currencies is a boon for players in the underground economy.

In an interview with ETPanache, Garrick Hileman, head of research, Blockchain exuded confidence that Stablecoin, a new class of cryptocurrency, could alter the status quo and remedy the inherent flaws of the old order.

Edited excerpts:

What is Stablecoin and how is it different from existing cryptocurrencies?
Stablecoins are cryptocurrencies that are designed to minimise price volatility. This can be accomplished through various mechanisms, such as linking its price to fiat currencies, commodities, or a price-stabilising algorithm.

Stablecoins contrast with other cryptocurrencies like Bitcoin that depend on the utility of the token and market demand for valuation.


How do you think Stablecoin will fare as a class of digital asset?
Significant volatility is one of the most cited factors responsible for holding back institutions and individuals from embracing cryptocurrencies for cases like retail payments and insurance.

Because they limit this volatility, Stablecoins have immense potential for users and businesses to use cryptocurrencies without the risk of prices dramatically changing after a transaction. Stablecoins are centralised.

Does that not defeat the purpose of blockchain-based cryptocurrencies?
Today, Stablecoins are in a sort of ‘Goldilocks Zone’ where they take some of the best from both crypto and traditional finance.

This comes with trade-offs like centralisation. While collateralising these assets involves a centralised authority and reserve — which we typically think is antithetical to crypto — it brings the scalability and certainty users need for remittances, risk mitigation and storing value. Stablecoins are still nascent and we expect they will evolve to become more decentralised.

What are the benefits of Stablecoin over fiat currencies, especially in economies dominated by cash?
Access to US dollars is something some of us take for granted. However, for the majority of the world, especially in underbanked and emerging economies, there’s often limited stability in local fiat currencies. So, Stablecoins can introduce these users to relatively stable stores of value, like the US dollar, that can bridge global commerce and enable financial sovereignty.

The digital nature and programmability of Stablecoins also open up new use cases, such as trust minimised escrow services. In a bull market, stability could work against an asset class that does not appreciate quickly.

How do you think it will perform in the next decade?
Stablecoins are typically not designed to appreciate in value.

However, as we highlight in our 2019 State of Stablecoins report, a growing number of Stablecoins offer what we characterise as ‘upside participation’. What this means is that growth in the use of a particular Stablecoin may allow its users to benefit financially in some way.

This can be accomplished by offering some type of transaction fee-sharing arrangement, or through another token that plays a role in the functioning of the Stablecoin system (like, governance).

However, it is important to recognise that Stablecoin systems offering upside participation are still relatively new and less tested than fiat-collateralised Stablecoins.

At present, the market has also clearly signaled that price stability is the primary desired quality in a Stablecoin, with decentralisation and upside participation as less important for now.