Stable cryptocurrencies as a medium of exchange (part 1 of 4)
I just wrote an introduction about stable cryptocurrencies as a medium of exchange
Why is the mass adoption of crypto payments stalling? Among multiple challenges, the biggest barrier to widespread use of cryptocurrencies in everyday transactions is their high price volatility. Which merchant or service provider would take the risk offsetting a price and earning revenues in BTC when their costs are in USD?
On the land of cryptocurrencies, high volatility is an ordinary event. Where 10%-20% price movement is normal in a day frame, it is hard to create a stable economy. Financially it would be hard to live in a world where a highly volatile asset is the main currency. Who would agree to pay rent in BTC when their salary is paid in USD? Who would get a mortgage denominated in BTC when their salary is in EUR? As it is today, already an increasing number of DApps rely on ether and the ethereum network where a bigger price volatility could easily cause complications in the system. We can agree that it is essential to have a cryptocurrency with stable price to keep the decentralised, smart contract economy rolling. So there is the question. What is the best way to build a stable coin that could bypass the wild crypto price movement, market speculations and create the backbone of the internet of value?
Beyond multiple attempts to create a stable cryptocurrency, several projects are on the horizon which are aiming to decentralize money creation and even starting to apply credit money attributes in their schemes. There are three + one main model which might be a potential design for stabilize cryptocurrency: the fiat-collateralized, crypto-collateralized, non-collateralized, plus the asset-backed cryptocurrencies.
Fiat-collateralized
One of the easier way to create stable coin is the fiat-backed cryptocurrency. In this simple scheme, the organization just deposit fiat into a bank account and issue the fiat pegged coin or token on a one to one ratio. The digital token has value because it represents a claim on another asset with some defined value. When the holder would like to convert the stable coin back into fiat, then the issuer destroy the stable coin and transfer the fiat back to the owner. This bank deposit tokenization has some drawbacks such as these tokens require trust in the issuing party, that the issuer actually holds the fiat collateral and they are willing to honor the IOUs.
Tether is one of the widely known fiat-backed stable coin, but to as a whole it’s not really considered a cryptocurrency, rather a company for several reasons: There are owners of this organization, it is a registered company, the owners of Tether have complete control over the money supply and they could hijack the project if it is in favor.