While cryptocurrency is getting an immense amount of attention from investors and stack holders, new coins continue to be announced almost every day. Among of these new arrivals, some are creating hype of being “stable” compared to existing crypto coins. Some of these call Tether, Basis and SagaCoin. Their values are rigidly tied to the Dollar, the Euro or other national Currencies.
Some may seem the link between these coins and real currency as appealing. It provides a unit of account and value. Regular crypto currencies like Bitcoin, Ethereum etc trade at fluctuating and somewhat unpredictable price. This shows how unstable their purchasing power and control over goods and services is. Hence they are un-attractive as unit of accounts.
No matter how promising blockchain and cryptology technology seem but I think no one would like to have a business or salary based on these coins. Stable coins try to solve this problem as their value is stable in terms of dollars or some other national currency. But this doesn’t mean they are viable. To understand why these stable coins won’t help crypto market to achieve stability, we have to understand the types of these coins first. There are three types of stable coins so far.
The first type of stable coins is fully collateralized. The operator holds reserves, equal or exceeding the value of coins in circulation. Tether claims to hold dollar deposit equal to the value of its circulation. That means, you have to trade a perfect liquid dollar supported by faith and credit of the US Government. This exchange may be attractive to money launderers and tax evaders but not to investors. The only problem with this model so far, is doubt about U.S Government that they will let it happen
The second type of stable coins is partly collateralized. In this case, platform holds dollars equal to 50% of the value of the coins in the circulation. This is similar to the situation when central bank sought to peg an exchange rate while holding reserves that are only a fraction of its liabilities. If any coin owner feel doubt, about the durability of the peg, he can sell off his holdings
The third type of stable coin is uncollateralized. Platform releases crypto coins along with crypto bonds. If the price of the coins starts to fall, the platform buys them back in exchange for additional bonds. The bonds are trade at a discount, so in theory, their price can rise because of the interest pay to bondholders in the form of additional coins. The issuer’s ability to service the bonds depends on the growth of the platform, which is not guaranteed. If the outcome becomes less certain, the price of the bonds will fall.