Introduction of crypto currencies and blockchain technologies was one of the highest technological breakthroughs, after the invention of the Internet a few decades ago. Initial premise related to these new algorithms and their major product – crypto coins, was that they exist to replace fiat currencies and solve issues that fiat currencies had for many years since their official introduction by monetary authorities. However, in order to solve fiat issues, crypto currencies needed first to solve their own issue which was extreme volatility. That was the moment when stablecoins entered the market stage.
Initial idea behind stablecoins was their peg to some other real asset, as a measure of their value. As real assets do not have extreme volatilities in values, they will provide stability for the value of specific coin pegged to such assets. Today, there are less than 200 stablecoins on the crypto market. Most popular stablecoin is Tether or USDT, whose value is pegged to 1 USDollar. There are also Gemini Dollar (GUSD) and Paxos Standard (PAX) also pegged to USD and Digix Gold (DGX) which is backed with gold. But, it should be taken into account that not all existing stablecoins are pegged to real assets.
So, where is the issue?
By definition, all stablecoins which are pegged to some real asset like fiat currencies or commodities, should be 100% backed by that asset. In theory that means if all people today who posses one of currently circulating $75 billion USDT`s try to convert it back to USD, they should be able to receive their USD`s without any problems. However, in practice, things are a bit different. Since there is no official regulation which requires from USDT`s issuer to hold 100% of US Dollars in order to 100% back USDT, there is also no one to control whether the company is holding its promise to USDT holders. This issue was initially raised by the U.S. Treasury Secretary Janet Yellen, noting that USDT might be potential threat to US monetary system, considering also that no one knows where the Tether Holdings Ltd holds its reserves which became significant during time. Well, the truth is that nobody knows. At the same time we can ask question is there back for USD or EUR in real assets? Well, nobody knows, but most certainly there is only to some small level. Same it could be asked a question if there is run on bank`s deposits, will the bank will be able to pay me out my savings? Most certainly not. So what are we hold on for both stablecoins and major fiat currencies is trust. We trust that they will continue to be stable.
As previously mentioned, not all stablecoins are backed by real assets. Innovation in the crypto world brought up coins which are pegged to different algorithms behind them. For example the DAI coin is created through collateralized loans, so it is backed by crypto collateral. Up to recently one of the popular and promising stablecoins on the market were Terra coins: TerraUST and Terra Luna. However, their recent crash was one to point markets to question if algorithmic stablecoins are good investments?
Terra USD is coin pegged by US Dollar. However, instead of a simple peg, Terra created an algorithm which was supposed to mint and burn coins in order to keep them pegged to USD. But the problem emerged with the latest downturn on the crypto market, when the algorithm was unable to execute transactions under high market pressure, so the coin crashed down to the level of some $0.2, while LUNA was halted from trading. Case of Terra sent a warning signal to the market, regarding significant deficiencies of algorithmic stablecoins. Though they can operate fine when markets are in ordinary mood, any market distortions impose a high risk for those coins.
Example of Terra shows that further improvements in algorithmic stablecoins are necessary and innovation-driven markets would certainly seek for the solution of this issue. On the other hand, there are still less-riskier risky coins with simple back like Tether, Paxos Standard, Binance USD, Gemini USD, who showed resilience during the latest market downturn so, could be good alternatives to algorithmic pegs.
Initial idea behind stablecoins was their peg to some other real asset, as a measure of their value. As real assets do not have extreme volatilities in values, they will provide stability for the value of specific coin pegged to such assets. Today, there are less than 200 stablecoins on the crypto market. Most popular stablecoin is Tether or USDT, whose value is pegged to 1 USDollar. There are also Gemini Dollar (GUSD) and Paxos Standard (PAX) also pegged to USD and Digix Gold (DGX) which is backed with gold. But, it should be taken into account that not all existing stablecoins are pegged to real assets.
So, where is the issue?
By definition, all stablecoins which are pegged to some real asset like fiat currencies or commodities, should be 100% backed by that asset. In theory that means if all people today who posses one of currently circulating $75 billion USDT`s try to convert it back to USD, they should be able to receive their USD`s without any problems. However, in practice, things are a bit different. Since there is no official regulation which requires from USDT`s issuer to hold 100% of US Dollars in order to 100% back USDT, there is also no one to control whether the company is holding its promise to USDT holders. This issue was initially raised by the U.S. Treasury Secretary Janet Yellen, noting that USDT might be potential threat to US monetary system, considering also that no one knows where the Tether Holdings Ltd holds its reserves which became significant during time. Well, the truth is that nobody knows. At the same time we can ask question is there back for USD or EUR in real assets? Well, nobody knows, but most certainly there is only to some small level. Same it could be asked a question if there is run on bank`s deposits, will the bank will be able to pay me out my savings? Most certainly not. So what are we hold on for both stablecoins and major fiat currencies is trust. We trust that they will continue to be stable.
As previously mentioned, not all stablecoins are backed by real assets. Innovation in the crypto world brought up coins which are pegged to different algorithms behind them. For example the DAI coin is created through collateralized loans, so it is backed by crypto collateral. Up to recently one of the popular and promising stablecoins on the market were Terra coins: TerraUST and Terra Luna. However, their recent crash was one to point markets to question if algorithmic stablecoins are good investments?
Terra USD is coin pegged by US Dollar. However, instead of a simple peg, Terra created an algorithm which was supposed to mint and burn coins in order to keep them pegged to USD. But the problem emerged with the latest downturn on the crypto market, when the algorithm was unable to execute transactions under high market pressure, so the coin crashed down to the level of some $0.2, while LUNA was halted from trading. Case of Terra sent a warning signal to the market, regarding significant deficiencies of algorithmic stablecoins. Though they can operate fine when markets are in ordinary mood, any market distortions impose a high risk for those coins.
Example of Terra shows that further improvements in algorithmic stablecoins are necessary and innovation-driven markets would certainly seek for the solution of this issue. On the other hand, there are still less-riskier risky coins with simple back like Tether, Paxos Standard, Binance USD, Gemini USD, who showed resilience during the latest market downturn so, could be good alternatives to algorithmic pegs.