Despite the fact that many people claim that cryptocurrencies such as the Bitcoin has now peaked, we are still seeing new units announced almost on a daily basis. One of the most distinguished of these new units are the innovative ‘stable coins’, such as Sagacoin, Basis and Tether. The idea behind these coins is that their value is rigidly tied to some form of fiat currency, such as the dollar and the euro, with the aim of making them less volatile.
It is easy to see why these units might be attractive to some people. They provide a much more reliable source of payment, especially when compared to the wildly fluctuating prices of digital coins such as Bitcoin.
Stable coins were created to solve the problems that traditional digital coins have, such as being an unattractive store of value. Despite this, it doesn’t mean that they are viable.
There are three types of stable coin now available. The fully collateralised means that the operator holds reserves equalling or exceeding the value of the coins in circulation, like the Tether coin. However, it is not immediately obvious that this model will scale.
The second type of coin is partly collateralised, yet the problem here is that as soon as a coin owner harbours doubts about the durability of the peg, they will sell their holdings, resulting in the equivalent of a bank run.
The last types is uncollateralised, and here too there is an obvious flaw in the model. The ability to service the bonds depends on the growth of the platform, which is not certain, which means that the price of the bonds will fall. More bond will have to be issued, making it even harder to meet interest obligations.
Therefore, despite the fact that many crypto enthusiast are claiming that stable coins are the next big thing, research shows this many not actually be the case at all.