Philippe Bekhazi is the CEO of XBTO Group, a cryptocurrency trading firm.
The current wave of stablecoin issuances is a result of the current bear market in underlying crypto assets, leading to upwards of 50 stablecoins on offer today.
Given an increasing media focus and heightened industry attention, it’s important to take both a step back and share our views on how things are likely to evolve over the next few years – arguably with the greatest velocity of change and boundless opportunities than any time since 2014.
Most importantly, we’ll shine a light on what’s truly at stake as Stablecoins come of age and emerge as a crypto instrument in their own right.
The state of play
A stablecoin is quite simply a representation of a stable collateralized asset blockchain largely used to hedge against the decline and volatility across general crypto collateral prices, which are certainly at an amplified state.
As such, they should be and generally are backed by real assets, such as a bank account backed one-for-one by U.S. dollars, euros, other fiat currencies, or even gold. They have no appreciation value and only reflect the performance of the underlying asset.
They can also be used as a mechanism to move value around in stable terms, and technically even for payments, although the speed of the underlying blockchain may be a limiting factor for time-sensitive transactions, for the time being.
While it may seem counterintuitive, it’s important to understand that stablecoins are crypto only by design to satisfy the tokenization process and ensure no double spend or on-chain rehypothecation takes place. Furthermore, most stablecoins, while sitting on a decentralized public blockchain, are centralized. Some simply are centralized assets representing a currency or commodity in a custodian account, while others are backed by crypto collateral or rely on algorithmic central bank style logic to create stability.
Taking the baton
One of the reasons for the recent expansion in stablecoin offerings is a lack of trust in the existing, long-term incumbent, Tether.
As the first stablecoin to be created, Tether enjoyed first-mover advantage but also bore the brunt of the growing pains associated with this new endeavor. As such, it sits on the slowest blockchain and has made a few miscalculations, specifically in failing to secure a steady third-party auditor (or a credible attestation) and demonstrate a steady bank account, although it has had three proofs of reserves (attestations).
This is by no means a direct slight at Tether as many crypto businesses globally have endured similar banking challenges. For all its speedbumps, Tether has proven to be very useful for the industry as a trailblazer in the space and they will continue to occupy an important part of the landscape.
That said, there are naturally challengers to the incumbents, and newer entrants such a PAX, GUSD and USDC are among these next-generation stablecoins that were designed to enhance the stablecoin ecosystem, provide a “better” counterparty risk product and help take this crucial crypto cog to the next level.
These aren’t the only players in town and there is room for many of the other offerings on tap. While there clearly will be some natural attrition and consolidation, many can survive and thrive due to the differentiation they bring to users, the growing pie of stablecoin stakeholders and use cases and their ability to solve for legacy technology issues.
Cracking the code
Scaling of the underlying blockchain technology is key to unlocking one of the major problems behind current offerings. Most of them sit on a relatively slow ethereum blockchain (using ERC-20 standard tokens), or in the case of Tether, the Omni protocol that sits on top of bitcoin (though Tether also recently introduced an ERC-20 version as well).
They are not very user-friendly for laymen to utilize in everyday situations either, prohibiting the onset and velocity of payment mechanisms.
While we cannot predict which blockchain technology will emerge strongest, we are encouraged that there is real competition to garner the highest network effect through a combination of speed, security and decentralization – and there will be at least a few competing public blockchains up to the task.
Sidechains may very well be the solution to scaling payments and could be very useful for stablecoins. That being said, the centralization inherent in incumbent payment systems does provide advantages that cannot be replicated in true decentralized systems.
There is currently no guaranteed endpoint or victor, but the key to cracking the code lies within the optimal point where sufficient levels of decentralization and security meet maximum transaction throughput to support demand.
We believe that significant technology breakthroughs, necessitated by the expanding ecosystem around stablecoins, put us a lot closer to that realization next year.
Passing the torch
The key takeaway for current and future issuers is to differentiate themselves and find a way to attain the aforementioned network effect.
To accomplish this, such issuers will need to rely on optimized technology, service providers, algorithms and network endpoints to make transactions cheaper and faster, with less friction. At the end of the day, the utility of a stablecoin is its ease of use – either through payment, speculative purposes or remittances.
Whereas Visa, Mastercard and American Express have huge networks to offer their customers, stablecoins will find a uniform way to transact across borders and technologies, all the while maintaining a fast and secure architecture, the impact of which will produce greatly amplified ramifications for digital assets globally.
In the not-too-distant future, there will also be ways to remit stablecoins nearly instantaneously with low settlement risk and on a real-time gross settlement basis. In order to get there, and since most centralized fiat-backed stablecoins typically rely on one issuer, one bank account, one auditor, and are tied to one jurisdiction’s laws, we need a better defined global legal and tax framework to govern such borderless assets.
While these are typically handled between G20 member organizations and at the OECD level, blockchain technology itself may become a solution. This is also a ripe issue for one of the emerging digital asset trade groups or Self-Regulatory Organizations (SROs) to tackle head-on, given its importance to the underlying health and growth of our industry.
Clearing the way
Furthermore, a clearinghouse of stablecoins that allows for the immediate quasi-fungibility between stablecoins will also become a necessity to maintain a frictionless mode of interchange among these coins (which are effectively mostly IOUs). This clearinghouse could be similar to a check-clearing process between banks but at a far more efficient pace.
Longer-term, the Holy Grail is for know-your-client (KYC) and anti-money-laundering (AML) checks and balances (or revised and potentially more adapted versions) to become enmeshed and intertwined within the blockchain so stablecoins can efficiently be used for all kinds of applications – from paying for a cup coffee to remitting money across borders.
While not all of these things will come to pass in 2019, it is shaping up to be a pivotal year for further innovations across many applications in the stablecoin sphere – which in turn will have a multiplier effect across the digital asset community and further disrupt traditional banking and money transfer intermediaries.
Currencies on scales image via Shutterstock
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