Stablecoin’s Rise to Stability

With decentralized finance (DeFi) catching the attention of the next generation of investors, a lot of questions about the stability of cryptocurrency have arisen. Stablecoins, cryptocurrencies with a value connected to a currency or commodity, have brought a sense of security behind such a new method of building wealth. However, the trust behind the regulation of stablecoins has raised a lot of controversy about how stable this cryptocurrency really is. 

History of Stablecoins 

Originating in 2014, stablecoins were created to counteract the state of liquidity of cryptocurrencies. The first stablecoin was BitUSD (Bitshares blockchain), but it lost value compared to the dollar in late 2018 which stirred up a lot of controversy. NuBits was introduced in September of 2014, but due to the instability of the BitCoin blockchain, NuBits was unable to withstand sudden falls in prices, so the coin’s reserves dropped. 

Types of Stablecoins

There are different types of stablecoins. A fiat backed stablecoin is when someone uses established currency to buy a stablecoin which is usually hosted by a financial institution. A less secure stablecoin is a crypto backed stablecoin. They’re stablecoins with a cryptocurrency backing. Usually these stablecoins have a crypto backing worth more than the stablecoin so that there is a “buffer”, so if the connected cryptocurrency loses worth, the investor doesn’t lose money. Metal backed cryptocurrencies use valuable metals like gold to preserve value. Kinesis silver (KAG) is a cryptocurrency that is backed by an ounce of silver.  

A harder to conceptualize type of stablecoin is an algorithmic stablecoin. An algorithmic stablecoin utilizes multiple assets (a stablecoin and another crypto asset) as a backing to the currency. Later an algorithm manages the relationship between the assets to preserve its value. Luna was an example of a failed algorithmic stablecoin as it wiped $60B off the digital currency market. This happened due to the fact that UST (United States Treasury) was pushed to 91 cents, pushing for a flood of people to buy Luna in large sums. However, it was unable to be redeemed back to $1 UST causing it to be delisted from crypto exchanges worldwide, plunging the worth of Luna to be invaluable. 

What Does This Mean for the Future:

In conclusion, stablecoins have been seen as a way to minimize the risk associated with investing in cryptocurrency. However, until blockchain technology is able to mediate and accommodate for the volatility of the crypto market, it may not be a sustainable solution to security behind this new way of investing.