Beware: Not all stable coins are created equal

by , 26 September 2018
Beware: Not all stable coins are created equal
Last week, I introduced MoneyMorning readers to the world of stable coins - price-stable cryptocurrencies.

Their ultimate goal?

To eliminate volatility and create stability in crypto prices.

Without price stability, cryptocurrencies may struggle to achieve mass adoption, widespread circulation and, ultimately, everyday use.

So these cryptos could be a game-changer if they're able to solve this problem. But as with most investments, not all stable coins are the same.

You get three types (which I briefly touched on last week).

Today and over the next two weeks, I'll explain each type and the coins that have been developed and if the coins could really be a game-changer for the crypto market.
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Fiat-collateralised – coins backed  by real currencies and gold

Fiat-collateralised are stable coins backed by a real-world asset like the US dollar or gold, which is controlled and owned by a central entity.

These stable coins’ function like a basic IOU system. 

Every token is collateralised by an equal amount of fiat currency (dollars), which is held by a central custodian (such as a bank).

Holders can redeem their token at any point for dollars.


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Three stable coins backed by real world assets

  1. Tether – the first and most popular stable coin

Tether is perhaps the most famous example of a fiat-collateralised stable coin.

Every Tether token is equal to $1. Tether should always trade 1:1 with the dollar.

Despite its stable value, Tether has come under a lot of scrutiny. For example, people say the company that developed Tether isn’t transparent. You can’t access any reports, which can truly prove the company has the dollar reserves to back every Tether token.

Because of this, many crypto enthusiasts are now doubting Tether’s validity.

Nevertheless, it’s the most widely used and adopted stable coin right now and it sits with a market cap of R2.7 billion, which puts it in the top #10 cryptos by market cap.

 

  1. TrueUSD – fully legal, transparent and collateralised

Just like Tether, TrueUSD is another fiat-collateralised stable coin.
But unlike Tether, TrueUSD is a fully fiat-collateralised, legally protected, and transparent, which is verified by a third-party.

In other words, TrueUSD posts on public forums regularly and anyone can receive the reports on Twitter. In addition, their reserves are held in escrow accounts which offer daily auditing and legal protection for holders.

The token is also managed by real people who have worked previously with Google, PwC, and UC Berkeley.

In the future, the company plans to tokenize other real-world assets such as TrueEuro, TrueBond, TrueYen to bring stability into the volatile world of cryptocurrencies.

Right now, TrueUSD is still compared to Tether with a market cap of R92 million. But Tether’s lack of transparency (which is key) will be its downfall and could spark a buying boost in TrueUSD.

You also get stable coins backed by oil and gold. For interest sake, let me briefly explain what they are…

 

  1. Gold and oil-backed stable coins

Then you also get an oil-backed token called the Petro, which was launched by the Venezuelan government. Each Petro is backed by a barrel of Venezuelan crude oil, to a total issuing cost of $6 billion. However, many say the petro is a scam. Even Venezuela’s own congress declared the Petro token illegal.

Every DGX token is equal to 1 gram of 99.99% London Bullion Market approved gold. The thing is, the value of gold can still fluctuate wildly in different currencies so it’s not necessarily “stable”.

Digix (DGX) is a similar concept to Tether and TrueUSD, except it’s backed by gold.

 
 
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Two major problems with fiat-backed stable coins
 
Yes, fiat collateralised tokens do create some stability, but it’s unlikely to become an everyday coin of choice for two main reasons.

Firstly, they’re not scalable. You would need tons of capital to serve as collateral if you want to mint enough tokens to have the ability of mass adoption.

Secondly, the central authority or custodian will have to be trusted with keeping the collateral. This is counterintuitive as central influence is exactly what cryptocurrencies want to safeguard against.

I can’t guarantee that stable coins will be around next year or 10 years’ time. But if one is able to solve all the problems cryptos face, it just might become the future currency.

That’s all for now.

See you next week where I’ll reveal the next type of stable coin.


Joshua Benton,
Managing Editor,
 The South African Investor
 
 
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Beware: Not all stable coins are created equal
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