Stablecoins – cryptos like no other
Crypto-currencies are still very volatile digital currencies, which are attracting the interest of many players seeing in their emergence a real opportunity to move away from traditional currencies. Despite this interest, there are still concerns about the security and the functioning of these crypto-currencies. To remedy this main defect, a principle of Stablecoins was thus imagined, having for objective to protect itself against the still very important volatility of the cryptomonies in circulation.
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A stable digital currency
A stablecoin is a digital currency linked to an underlying asset such as a national currency like the U.S. dollar or a precious metal like gold. This linkage means that theoretically the entity managing the stablecoin commits to holding the equivalent in backing assets as the number of stablecoins in circulation. It is based on a decentralized distributed network and is not issued by a central bank.
The main shortcoming of the crypto-currencies that stablecoins tackle is their high volatility. Indeed, the fact that they are backed by an underlying asset is supposed to guarantee them more stability. Indeed, crypto-currencies are known for their high volatility – they can vary from a simple to double and vice versa in a single day – which makes their role as a store of value quite problematic.
On the other hand, stablecoins allow their holders to protect themselves against significant variations in the exchange rates of their national currencies, for example in countries with high inflation.
However, stablecoins are also subject to criticism. The most famous stablecoin is Tether. It has been the subject of several controversies. Its parent company Bitfinex is accused by the community of not holding the equivalent in dollars.
The rating agency Fitch believes that the rapid spread of the USDT could affect the stability of the credit markets in the short term in the event of a massive redemption.
A digital currency of control
The other major criticism of stablecoins is their possible lack of independence. In particular, they are criticized for their lack of decentralization, since stablecoin depends in some cases on an issuing entity as is the case with the crypto-currency Tether.
Indeed, if the lack of centralization can cause fear of drifts such as the risk of loss of collateralization mentioned above. Conversely, too much centralization, it raises the mistrust of the crypto communities that drive the ecosystem.
These communities linked to blockchain research are looking for automation mechanisms based on « smart contracts » systems to recreate a form of control authority or protocol legitimization that is not linked to a governmental or institutional authority.
Stablecoins behind private initiatives
Beyond the first pioneering projects, driven by libertarian motivations, others have begun to emerge with more commercial ambitions. Among these, the most emblematic was surely the Libra stablecoin project announced in 2019 by Facebook. The potential scope of a digital currency accessible to all of the 2.8 billion users of the social network (not counting its other platforms) has created a real political awakening of the states, which saw it as an interference in the regal power of the states and a challenge to their sovereignty.
Despite the many assurances that the American group has put on the table in terms of stability – Libra was to be supported by a basket of national currencies of countries with the « strongest » currencies. The outcry of the monetary institutions of the European Union, such as France or Switzerland and the concerns of the Fed have pushed the Menlo Park group to postpone its project to a date that is still unknown.
In France, the first stable digital asset backed by the euro was created by the Casino Group. With Lugh, the French retail group has taken the French and European institutions by surprise. The idea will be to allow a gradual acclimatization to this new virtual currency, before it is used more widely with properties aimed at building consumer loyalty.
Mimo is another important player in the democratization of stablecoins. Their protocol is a stablecoin and decentralized token called PAR and coming from the blockchain of Ethereum, one of the most famous cryptocurrencies. In concrete terms, you will be able to « borrow » this PAR token by providing the equal amount in cryptocurrency as collateral (Mimo currently accepts Ethereum, Bitcoin and USDC deposits). In the event that the value of this collateral becomes less than the amount you borrowed, the platform will sell the collateral to recover its due and your account will be « liquidated ».
Finally, Visa is also addressing this complex but necessary topic by announcing that payments via USD Coin are possible via VISA bank cards. USD Coin is the latest addition to the long list of 160 currencies supported by VISA worldwide.
As you will have understood in this article, the objective of Stablecoins is to make crypto-currencies more attractive to players who are legitimately afraid of their instability. The security provided by Stablecoins is the first step towards strengthening the security of digital currency transactions, as these have a real monetary value assigned to them. Cryptocurrencies should inevitably join the family of payment methods, and solutions like Stablecoins accelerate this implementation. The link between real money and Stablecoins remains necessary, we are not talking about replacement but more about collaboration between these two types of currencies.