Jorge Chiva, Web Developer at PaynoPain
Today everyone knows cryptocurrencies, or at least heard about Bitcoin. And is that since the Bitcoin appeared on the scene, there have been many stories that have caught the attention of the general public. Since that meteoric rise in the value of Bitcoin in mid-December 2017, the value of this cryptocurrency has been on everyone’s lips, including thousands of Internet users initially far away from the blockchain world, who were starting to consider investing in cryptos, given the benefit that some came to obtain.
From that moment, the value of Bitcoin came to be in the spotlight and, of course, stability did not enter into the plans of the most popular cryptocurrency, as it suffered huge ups and downs of value in a matter of days. This unstable trend continued, with more downs than increases, until mid-September 2018. In that period, when all eyes looked forward to seeing what the most famous cryptocurrency was able to achieve, Bitcoin became synonymous with volatility to the eyes of the world.
This lack of stability has led to the creation of another type of cryptocurrencies that can replace this disadvantage, minimizing the volatility of the price: they are the Stablecoins, cryptocurrencies of stable value. And what supports the stable value of these currencies? There are several types of Stablecoins, and each has its own mechanism to stabilize its value.
Some Stablecoins support their value through the value of other cryptocurrencies in their own blockchain, such as Ethereum and its SmartContracts. SmartContracts are programs that run on the Ethereum network, paying a cost in their currency, the Ether. This solution for the stability of the value is based on the creation of SmartContracts with algorithms that regulate the value of the Stablecoin to avoid high volatility. Of course this type of Stablecoins has a great disadvantage, and that SmartContracts can have errors that could be exploited.
Another type of Stablecoins are those that have their value backed by an intermediary. The price of the currency can be supported by a raw material (in the same way as current money) such as gold, in a fixed proportion. In this example, the issuer of the currency would act as an intermediary creating a reserve of gold for the value of the cryptocurrency issued. Whoever is in possession of that cryptocurrency can make a settlement in gold. Therefore, the value of this Stablecoin will be linked to the value of the gold, adding the costs of the reserve of the raw material.
The current money also serves to support the Stablecoins and would work in a similar way to the previous example, only that in this case the value of the Stablecoin is linked to the value of the Fiat currency with which it is backed up, so in this example the value of Stablecoin will also be affected by the cost of reserving the money. That money will be held in a bank, so with this type of Stablecoin, trust in the intermediary is crucial.
To solve this problem of blind trust in an intermediary, 6 international banks have announced their intention to issue their own Stablecoins in the IBM blockchain, backed by their own fiat currencies. Will these virtual assets achieve as much popularity as Bitcoins and other cryptocurrencies? We will have to wait to see it, but by definition it seems complicated that the faithful followers of the blockchain philosophy bet on investing in this type of assets. In a few months we will see what become the already famous Stablecoins.