Two of the largest companies in the crypto space, Coinbase and Circle, have formed a joint venture called the ‘CENTRE Consortium’ which seeks to bolster the adoption of cryptocurrencies backed by fiat currencies. The two companies, consistent with their shared vision, aim to provide a global financial system that is built on blockchain and crypto.
One of the Consortium’s initial projects is a platform that enables users to make deposits in fiat that can be converted into the ‘US Dollar Coin’ (USDC). USDC, which is pegged to the US Dollar, will “[make] it possible to exchange value between people, businesses, and financial institutions just like email between mail services,” CENTRE’s website states. The website also claims that the platform will be open-source and powered by smart contracts, enabling developers to apply fiat currencies into blockchain applications.
On their website, Coinbase outlines three current use-cases for USDC: faster transactions between Ethereum wallets for sending or receiving USDC, digital dollars for purchasing items in the crypto space, and a programmable token that can be used by developers and fintech companies. The exchange also emphasizes that using blockchain-based dollars like USDC makes it easier to fulfill the aforementioned use-cases than using traditional fiat dollars.
According to CNBC, USDC will be traded on Coinbase, one of the most well-known cryptocurrency exchanges in the world. The exchange stated on their website that USDC will be the first of its kind to be supported by Coinbase and is “fundamentally different” from other cryptocurrencies in that its value does not fluctuate against its reference currency.
What are Stablecoins?
One of the primary obstacles hindering the widespread use of cryptocurrencies as mediums of exchange is their volatility, wherein prices skyrocket and plummet within a short period of time. This conundrum has led to the development of ‘stablecoins’ which are designed to be as stable as fiat currencies while still adhering to the core values of crypto, namely in the realm decentralization and security. The prices of stablecoins are usually linked to real-world assets such as the US Dollar and the Euro to ensure stability.
There are two primary types of stablecoins: asset-backed and algorithmic. The former, which is the basis of USDC and Tether, are backed by reserves of fiat currencies they are pegged to. Issuers of these coins normally tokenize these currencies by exchanging their tokens for fiat deposits which are placed in a bank account and left untouched until a user redeems the coins for fiat.
On the other hand, algorithmic stablecoins are controlled by algorithms that match the supply of coins with its demand in order to maintain their value. Garrick Hileman, head of research at Blockchain, stated that algorithmic stablecoins are “challenging to design” and are largely “unproven at this point”. Examples of algorithmic stablecoins that are currently in development include Basis, Terra, and Carbon.
While the phenomenon of stablecoins can be seen as a step towards mainstreaming cryptocurrencies as legitimate means of exchange for goods and services, critics claim that they go against the principles of crypto as they are ultimately subject to centralization given that their value is contingent upon certain controls. They also raise the question of whether stablecoins can truly maintain their value as fiat currencies such as the US Dollar, which backs several stablecoins, are depreciable assets – meaning stablecoins will ultimately lose its value over time as well.
CoinCorner co-founder Danny Scott stated that while different companies have “different reasons” for “creating and adding their own stablecoins”, others simply “see it as an opportunity to jump on the PR wagon”.
Ultimately, only time will tell whether stablecoins are a new frontier in the crypto space or simply another fad.
10. “The State of Fintech”, Blockchain Presentation as of 30/10/2018 (https://www.blockchain.com/research)