Steemit Crypto Academy week 7: Stable coins - Part2
Though Stable coins have a wide range of benefits and positive implications they have caused in the crypto space, particularly in bringing about mass Crypto adoption through bridging the gap between the fiat world and the Crypto world. However, these also have some demerits/negative implications. It should be noted that stable coins are a risky investment like any other cryptocurrency; therefore, one ought to invest or trade Stable coins with money they can afford to lose.
There are plenty of criticisms that many stable coins have faced in the due course of their operations for instance Tether has been accused of pumping the Bitcoin price with millions of its USD reserves and partly had a hand in the 2017 Bitcoin’s bull run.
Crypto critics have long called for Tether to subject itself to an independent audit to verify the veracity of its claims, but such checks have not been forthcoming. Recent changes to the terms on its website also suggest that the stablecoin is being backed by other assets. It says this may include receivables from loans issued. source
This shows some lack of transparency in Tether and certainly builds distrust for Tether from its would-be potential investors.
Some decentralized stablecoins have also been running into difficulty. DAI — an ERC-20 token pegged at 1:1 with the U.S. dollar, with an exchange rate maintained by overcollateralizing with Ether (ETH) — has struggled at times to maintain its $1 price point.source
Demerits of Stable coins
Prone to failure – Central point of failure
Stable coins like Tether, USDC are prone to failure since they rely on a centralized 3rd party company that keeps their fiat reserves and manages the token circulation. These have to be trusted by the investors yet trust is a detestable thing in the world of Cryptocurrency. There is a common slogan in the crypto space that goes like “Don’t trust, just verify.” When the centralized companies that hold the reserve currencies for stable coins are attacked, it’s an implication of losses to the investors’ funds hence the downfall/setback for Stable coins.
Basis which is one of the stable coins project shut down in December 2018 after having raised $100 million dollars.
Unprofitable – No ROI
Stable coins are not good for investment. For instance, investing $1000 in Tether where you buy and hold 1000USDT tokens for 3years can yield no profits to an investor. This is because Stable coins have a fixed price implying that regardless of any bullish market conditions they will always remain at that fixed price.
We have trusted banks and governments for a very long time and we have seen the negative economic consequences including corruption, inflation just because of the manipulative tendency of the selected few individuals operating the centralized systems. Some stable coins are also centralized and this just retards the progress of other normal Cryptocurrencies such as Ethereum, Bitcoin, Steem..etc that are decentralized.
Dependence on the underlying asset
Stable coins such as fiat collateralized stable coins rely on an underlying asset value as a backup for their price stability. When the price of that underlying asset, let’s say the fiat US dollar fluctuates negatively, it certainly affects the price of the stable coin. Though fiat currencies tend to offer some level of stability, they also do fluctuate at some point due to the economical and political issues in the nation. Therefore pegging the value of a stable coin to such currencies, just keeps it in fluctuation mode.
Require some level of KYC
Stable coins like USDC are highly centralized and regulated. These require some level of know your customer which is something that undermines the aspect of anonymity in the Crypto space. Tether limited and USDC can freeze the crypto funds of some individual accounts in case they wanted to.
The high costs of running the management work of a central unity
Since stable coins tend to rely on a 3rd party company that keeps their reserve currencies. The 3rd party companies such as Tether limited, USDC spend some of their resources in facilitating external audits that ensure that their Fiat reserves correspond to the Tokens in Circulation. They have to ensure such statistics in order to build and maintain trust among the public users of their tokens. (Investors and traders)
Will stable coins dominate the future of finance?
One of the core purposes of innovating Stable coins was to solve the major problem of high Volatility in the Crypto Market. However, when Cryptocurrencies like Bitcoin, Ethereum and the rest become more stable in the future; I am envisioning those times when Crypto has finally gone mainstream; that leaves us a question, will stable coins remain relevant in those future times? Or will they still have the mandate of dominating the future of finance?
In conclusion, Stable coins are a very significant step towards mass Crypto adoption. If it’s a Crypto train that is on its long journey to its final destination, stable coins innovation is acting as the fuel for the Crypto train regardless of the criticisms and challenges along the way.
Homework task: Write about any one of the following Stable coins
- USD Coin (USDC)
- TrueUSD (TUSD)
- Paxos Standard (PAX)
- Digix (DGX)
Rules and guidelines to follow
- Post all your homework articles in the Steemit Crypto academy.
- Only Steemexclusive homework articles will be curated.
- Your homework article should range between 300 - 1000words
- Use an exclusive tag #yohan2on-week7 as one of your first 5 tags. You can as well tag me @yohan2on so that I can easily find your post.
- Use copy-right free images and showcase their source.
- Be creative and original in your articles.
- Any borrowed content from other sources should be fully referenced.
- Plagiarism and spinning of articles will not be tolerated
- This homework task runs till 28/03/2021