The cryptocurrency landscape has been characterized as a digital wild west for years, in large part due to its lack of regulation and lack of relevant accounting standards. As a result, it’s been difficult to pinpoint the triggers that contribute to the extreme volatility of these digital assets. Overall, the unpredictability and the inability to foresee crypto’s future worth has made adoption and investment difficult. But stablecoins may be the solution—and have already caught the attention of developers endeavoring to improve financial services.
In a recent report, “Building a Better Stablecoin,”Joel Hugentobler, Analyst of Cryptocurrency at Javelin Strategy & Research, dives into what stablecoins are, the most popular use cases, and what issuing teams can do to ensure they build a better stablecoin.
What Are Stablecoins?
A stablecoin is a type of digital currency that is pegged to what is considered a stable reserve asset, such as fiat currency or gold. The objective is to offer all the perks of using cryptocurrency without the instability that may come with it. Fiat currencies rarely experience this type of price volatility as compared to unpegged cryptocurrencies such as Bitcoin.
Merchants are increasingly adopting stablecoins as they are borderless, instant, and low-cost transactions. Use cases are expected to continue expanding as they become a more permanent fixture in the cryptocurrency ecosystem.
“A stablecoin can provide a viable cross-border payment option to send money at reduced costs with faster settlement speeds, where international wires can take multiple weeks,” said Hugentobler. “They can also offer programmable features through what’s called smart contracts. A transaction could be preprogrammed to transfer funds on a home purchase that’s completely dependent on an inspection being completed.”
“I think it’s going to be a key driver as stablecoin adoption increases that the benefits and use cases will rise as well,” he said.
Hugentobler believes that as the adoption for stablecoins increases, banks will experience a healthy dose of competition for services.
How Issuing Teams Can Build Better Stablecoins
Stablecoins may be the answer to a more stable digital asset, however not all are created equal. To build a better stablecoin, issuing teams must focus on financial transparency.
“The single most important thing an issuer can do to build a better stablecoin and promote confidence for consumers and users is to provide transparency through verified and audited financials,” Hugentobler said.
“These reserves, how they are backing their stablecoin, need to be clearly stated because stablecoin issuers like Circle and Tether, at times can be under pressure when they need to fulfill redemption requests near instantaneously,” he said. “Providing comprehensive and audited financial statements can induce confidence in consumers.”
Stablecoins Will Continue to Gain Traction
In the crypto world, stablecoins are an attractive option to risk averse crypto users. Without having to weather the impact of price or market volatility, use cases will continue to rise, settlements will be instant, and payments will be secure.
Although still in its infancy stablecoins are poised to revolutionize the future of finance.
Learn more about the recent growth in the stablecoin sector, as well as the benefits of stablecoins.