Stablecoins: Are They the Next Crypto Bubble?

In the fall of 2018, more stablecoins are hitting the markets, but also raise the skepticism of the crypto community.

Stablecoins are becoming the next hot trend in the world of crypto assets, but it is possible they are also the next bubble, skeptics point out. After a recent report by Blockchain revealed that there may be up to 57 stablecoins coming, more scrutiny is pointed to the different varieties of mostly dollar-pegged assets.

As of September 2018, three fully legalized, institutionally-backed digital assets have become active: Gemini Dollar (GUSD), Paxos (PAX), and most recently, USDC by  Circle, which started trading on Poloniex on September 27.

WhalePanda believes stablecoins will have a negative effect on the crypto community:

For fully backed, legalized stablecoins, the biggest problem is they comply with banking requirements, in effect completely reversing the potential for unrestricted value transfers. Limitations of account and transaction sizes, as well as complete user verification, apply for holders of the fully legalized stablecoins.

However, different types of coins and tokens are constantly being announced, with much weaker, or secretive mechanisms of keeping their dollar peg. Cement is an upcoming coin recently announced:

Vault, another up and coming project, throws gold into the mix of assets backing the coin:

Among stablecoins, projects like BitUSD have diverged from their fixed price. As for Nubits (USNBT), it is the best example of a failed stablecoin, which never regained its peg after the last collapse, and keeps hovering around $0.11. Nunbits was left to regulate its price based on trading, and did not survive a market run, as traders sold USNBT for Bitcoin. The team did not have the reserves to prop up the price, and USNBT seems like an asset that has forever lost its credibility.

The founder of Kowala, Elland Glover, emailed Cryptovest with an explanation of the unique failure of Nubits:

“The first generation of asset-less stablecoins maintained their price-pegs with secondary coins, or “shares”, that promised interest. These shares would then be used to buy back stablecoins, temporarily removing them from the money supply. However, when belief in the price pegged coins faltered, as was the case with Nubits, such a system became subject to “death spirals”— if a shareholder earned rewards in a stablecoin that was rapidly losing value, they became less likely to volunteer to buy more shares.”

Glover added that Kowala uses an algorithm to burn coins and stop the “death spiral” to a lower price.

While stablecoins may be essential to trading and moving funds in the crypto space, each new coin will have to prove its stability based on the chosen method - as startup teams attempt to hold the role of a central bank.