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Stable coins: the traditional finance in the crypto world

2018 seems to be the year of stable coins, i.e. those cryptocurrencies whose value is anchored to fiat currencies, gold or other more “physical” assets.

The Blockchain.com team, in a recent report, states: “There are at least 57 stable coin projects active and this makes them one of the biggest crypto asset categories“.

But why are they so valuable?

Initially, stable coins were conceived as typical financial instruments: price volatility needed a reference point that fluctuated like a legal tender, with the prospect of safe haven and “stability” while remaining within the crypto ecosystem. And so they started taking over all the major exchanges, the most famous is Tether (USDT) but soon others followed.

Since then, stable coins have begun to receive special attention both as alternative stores of value and units of account, but also for active uses such as financing Venture Capital.

For an investor, having the ability to invest or buy stable coins could be a more stable and resilient source of access to the crypto ecosystem even compared to the traditional existing finance.

How to evaluate a stable coin project?

First of all, it is important to understand the fundamentals of exchange rate pegs in order to evaluate stable coin projects.

In this respect, in fact, already in the traditional financial system, middle-income countries often tie their currencies to other more important ones so as to maintain the purchasing power stable. If this were the real purpose of stable coins, then we would be talking about traditional crypto-converted finance with existing risks.  

Among the risks of traditional stable coins linked to a fiat currency, there could be a mismanagement by the counterparts (the companies issuing the tokens) or by the intervention of governments that regulate the company.

In short, it can be said that there is very little that automation and smart contracts can regulate in the case of stable coins that, by nature, are often centralized to maintain the value stable.

In fact, there are two types of stable coins: one that assumes a convertibility, so there must be a central entity that converts the crypto into a collateral (Tether or Circle are two examples), others like MakerDAO, instead, rely on algorithms. In this last case, they are algorithmic stable coins that are not connected to a collateral that needs a central authority. For example, they can use ETH as collateral linked to a smart contract that issues more or less ETHs depending on its price in Dollars.

In a way, the things to do to evaluate a stable coin before investing include the same procedure that experience teaches for the ICO (Initial Coin Offering) sector, which has seen a certain downsizing after last year’s strong excitement against a large number of failed project and investments gone up in smoke.

The steps to follow are:

  1. Research the team, what kind of experience they have and how they operate;
  2. Analyze the country in which they operate: if they have a license, or are they only registered, if there are third parties to refer to and if so check who they are;
  3. Look at the project in terms of regulations and responsibilities;
  4. Check the offer: how is the 1:1 parity achieved and how they intend to proceed to protect the customer, is there any insurance;
  5. Check what kind of payment processors they use and what relationships they have with banks;
  6. Review all licenses related to anti-money laundering controls, for example, or other compliance measures.

It is important to understand that what appears to be a solution today, may become a gigantic complication tomorrow, that’s why the evolution of stable coins needs more time.

Stefania Stimolo
Stefania Stimolo
Graduated in Marketing and Communication, Stefania is an explorer of innovative opportunities. She started out as a Sales Assistant for e-commerce, and in 2016 she began to develop a passion for the digital world, initially in the Network Marketing sector, where she discovered and became passionate about the ideals behind Bitcoin and Blockchain technology, which lead her to work as a copywriter and translator for ICO projects and blogs, and organize introductory courses.
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