A deep dive into Stablecoins
What are stablecoins?
Stablecoin is a new type of crypto asset that often has its value backed by another real world asset, in order to offer market value stability. These stablecoins can be backed by fiat currencies such as the United States dollar, or commodities such as gold.
Traditional cryptocurrencies are usually volatile due to sudden market value fluctuations, meaning that they are nearly impossible to be employed in day to day real world use cases by the public. Stablecoins attempt to become a bridge between fiat and crypto currencies by removing some volatility from the equation and being collateralized, or, simply said, backed by a certain amount of assets.
Stablecoins give users a safe place to store their assets. They can be easily converted from unpegged currencies, removing the need to return to fiat. Also, conversions between crypto and stablecoins will usually be much more reasonable than similar operations that involve fiat currencies.
How do they achieve stability?
There are three categories of stablecoins, depending on how they achieve collateralization.
Fiat-collateralized stablecoin’s stability is maintained by fiat currency reserves. For example, let’s take a look at one of the most popular stablecoins — Tether(USDT), which claims to be 100% backed by U.S. dollars reserve. In this case, each USDT is guaranteed by $1 kept under management of a fiat institution. In other cases, commodities have been touted as a way of collateralizing crypto, with Venezuela’s government unveiling plans to launch the petro — a coin that’s value was to be tied to one barrel of oil.
These stablecoins are backed by other cryptocurrencies. However, since crypto assets are subject to price volatility, all possible issues are usually covered by “over-collateralization” of stablecoins, meaning that exceeding amounts of reserves are provided to back the lower amounts of coin. This can help to keep decentralization alive, with crypto reserves absorbing the impact of any fluctuations, but the downside is that huge amounts of resources can be required to get them off the ground.
Non-collateralized (Algorithmic) stablecoins
Last, there are non-collateralized stablecoins. This type of assets isn’t backed by a reserve or fiat asset, but includes an operating mechanism to retain a stable market value, similar to central banks printing banknotes to maintain price valuations of fiat currency. They monitor the market to increase or decrease the supply of tokens in an autonomous manner, using a smart-contract. The ultimate goal is to keep market values in line with that of a pegged asset such as the U.S. dollar.
Regulations and the future of stablecoins
While there are many markets adopting stablecoins for everyday use, the regulatory landscape is yet unclear and confusing. United States have taken a more attentive approach to crypto assets in general, and while there’s nothing to be said for sure, the regulation will likely depend on stablecoin’s collateralization method. This means that U.S. dollar-collateralized stablecoins might actually receive treatment different from the ones that maintain valuation by algorithms.
This summer European Central Bank has stated that stablecoins with a clear governance framework may “nevertheless be hampered by the uncertainty relating to the lack of regulatory scrutiny and recognition”, becoming redundant in the use outside of crypto asset markets. However, some economies take a lot friendlier stance toward cryptocurrencies. Japan has been leading the search for a way to regulated stablecoin use and the results are supposed to be published in the next G7 report. Japanese executives find crypto assets very appealing as a way for foreign workers to make remittances without suffering from high fees.
Coming from a regulated market, our experts understand how to build an auditable cryptocurrency ecosystem that can safely navigate through a new territory. One way of instilling confidence and overcoming a major challenge facing stablecoins involves complete transparency. This can be achieved by opening audit books to the public and ensuring that stablecoins are actually 100% backed by USDT.
Nimbus Core has such a product to offer — NSC. Nimbus Stable Coin(NSC) is utilized as a main asset in our most anticipated launch — IPO HUB. The asset’s market value is guaranteed by USDT. NSC conversion rate is kept 1:1 with USDT, meaning that 1 USDT in NSC is always equal to 1 USDT in the real world scenario. In order to deliver maximum transparency to the public, Proof-Of-Funds algorithm enables a clear view on all committed transactions, while reserve asset audits will be performed monthly by third-party auditors.
“Even though “regulation” is seen as a bad word, clear guidelines from financial bodies could help stablecoins — and the wider crypto sector — grow. I believe that adequate regulations would better protect crypto users, encourage innovation, reduce cases where digital currencies are used for illicit purposes and make cyberattacks less frequent.” — Mr. Andrea Zanon.