Stable Coins - A Solution To Crypto Volatility

Welcome back crypto enthusiasts, to the weekly instalments of the latest news, topics and worldwide updates from Magnet Capital.

As part of the feedback we received, we will be trialling a move to monthly reviews (second Tuesday of each month) they will consist of a coin/token spotlight, in-depth monthly topic and a strategic opinions piece. Our readers will still get a digest weekly of major price movements and top news headlines, small and direct to keep you informed.
 

This week’s hot topic - Stable Coins - A solution to crypto volatility

Since Bitcoin was created in 2009, one of the most discussed downfalls of crypto assets has always been their volatility. Not very many are daring enough to comfortably transact in an asset that fluctuates in price as much as Bitcoin does today. Just ask the gentlemen that paid 10,000 Bitcoin for two Papa John’s pizzas in 2011 how they feel about their $10m pizzas (based on today’s valuation).
One alternative solution that provides all the benefits of blockchain technology that is heralded as more acceptable to the financial and political establishments are ‘stable coins’. In their simplest form, stable coins are cryptocurrencies whose value does not fluctuate. To date there have been three primary models used for designing stable tokens:

  1. Centralised IOU issuance – This model is used by the largest stable coin in current circulation Tether, and the latest stable coin, Saga, which is backed by some of the world’s leading economists. In both cases, a centralised organisation holds assets deposited in bank accounts and issues tokens that represent a claim on the asset in reserve. In Tether’s approach, 1 Tether in circulation represents the rights to claim USD$1 held in reserve. Thus, it is in no-ones interest to pay more than a dollar for an asset they can only claim for $1, similarly it is in no-ones interest to sell for less than $1 when they can claim their $1 in reserve. Saga has a similar model but it’s assets in reserve are a basket of global currencies as opposed to just the USD.
  2. Collateral backed coins – The model adopted by Australia’s most successful ICO, Havven, along with others such as Maker, these Stable Coins are backed by other assets that are on the blockchain (i.e. other crypto assets). The total value of the Havven tokens is used as the collateral that back the stable tokens, Nomins. Each Nomin transaction incurs a fee that is paid to the Havven holders. Havvens and Nomins work together to give each other value. The greater demand and use of Nomins results in more transaction fees, thus Havvens become more valuable. Maker uses a simpler approach where the underlying asset backing the stable coins is Ether (Ethereum).
  3. Seigniorage Shares – In this model, there is an algorithm that manipulates the supply of coins to keep the price stable, in a method not too dissimilar to how central banks manage money supply. These are not backed by any asset like the first two models, but rather there is an expectation that token value remains stable. This method is used by the stablecoin Basecoin.

 

Magnet's Take

Stable Coins are still very much in their infancy and the best model of obtaining value stability whilst providing speed, scalability, low transaction fees, privacy and decentralisation. However, what Stable Coins offer is the ability for users to lock in future contracts, whose value won’t fluctuate significantly in the short, medium and long term. It also solves the current crypto asset issue of users not wishing to transact for goods and services in the fear of overpaying based on a future valuation (like the pizza example!).
However, in reality fiat currencies are not stable, in Australia we do not value our goods in USD on a daily basis to determine if we overpaid or underpaid based on last year’s AUD/USD exchange rate. As crypto assets gain more prominence, adoption and usability they will find a fair price that is not subject to the same levels of volatility experienced today. This could make them a lot more appealing to transact daily. Whether or not this lessens the demand for stable tokens is unknown.

 

Adoption

  1. Binance, the world’s largest crypto exchange by daily volume, has moved operations to Malta. It has done so to benefit from the more lenient crypto legislative frameworks. The announcement was made on the back of warnings of intervention from the Financial Services agency of Japan into operations conducted in Japan.

  2. Coinbase partners with Barclays. In a bid to make crypto more accessible to investors with GBP. Coinbase has big development plans including adding more tokens to the platform and now, global reach.

  3. US Congress report praises cryptocurrency and blockchain - in a recent economic report on the state of the economy, blockchain hailed as the next big thing after the internet, transparent and tamper proof and can outperform traditional currency.

  4. France build ICO framework - in an effort to lure more FinTech Startup businesses, France is working on regulatory framework to become the hub for ICO’s.

  5. UK Treasury Department launch a blockchain/cryptocurrency taskforce to examine the potential benefits and opportunities, innovative qualities and to what extent the technology could disrupt/replace traditional means of payment.

  6. South Korea’s companies funding exchanges - The largest multi-billion dollar conglomerates in various sectors including insurance, telecommunications, gaming, and Internet are entering the cryptocurrency market by funding up-and-coming exchanges.

  

The Market

  • This weeks Bitcoin High was ~US$9,200 up from ~US$8,500 at the start of the week, before a sharp decline to ~US$7,900 low.

  • The entire market moved backwards once again losing about ~4.5% from US$330Bn to US$315Bn to finish this week off.

  • ICO’s have experienced a significant cool down from their highs in January, as the market licks its wounds. A drop from US$1.4Bn to ~US$530Mn currently in March.

  • Despite the declining market, Magnet portfolio top performer of the week, Verge gained ~62% - following a successful community raise of 55Mn Verge tokens at $0.04 (US$2.2Mn) for infrastructure development and partnerships.

  • Bitcoin dominance picks up again to 44.7% from 43.6%, showing relative strength in the most popular cryptocurrency.

Egor Sidelska