Despite being a rapidly-growing industry, cryptocurrency is not the right choice for everyday finance.
Price fluctuation, or volatility is one of the most significant barriers that exist in the cryptocurrency space. It is possible for cryptocurrencies to fluctuate by as much as 16% within a day.
It would be great if money could have the same stability as traditional fiat currencies but still allow for cryptocurrency use. It would be possible to avoid liquidating all your holdings in your bank account, and potentially not being subject to a higher gain tax.
For those reasons, and more, “stablecoins” came into existence.
What Are Stablecoins and How Do They Work?
The stablecoin works in the same way as regular cryptos but has a fixed value. Stablecoins are based on blockchain technology, have the ability to be distributed and function in peer-to-peer networks, but their price can resist volatility. That’s why the collective market capitalization of all stablecoins has quickly grown to a whopping USD 180 billion.
Stablecoins can be derived their price stability by using different strategies. Some stablecoins can be tied to one of a number of fiat currencies, commodities, such as gold or the US dollar, while some others may use a combination of commodities, crypto and fiat. Together, these stablecoins can be called collateralized stablecoins.
Additionally, some stablecoins rely only on an automatic smart contract to ensure their price stability. They are known as algorithmic stabilizecoins.
The stablecoin market, however, is dominated by collateralized stabilitycoins, such as USDT and BUSD.
The Limit on Collateralized Stockablecoins
Collateralized stablecoins are the original stablecoins. These stablecoins, like USDT and USDC are able to maintain a near-constant ratio of 1:1 with the US dollar with their protocol that “claims” to physically hold one US dollar for every token in the circulating supply.
Investors and governments have quickly embraced this fiat-backed stablecoin model. These coins are seen as more secure by investors because they rely on fiat currency. However, the government has supported this concept since it encourages cryptos and does not pose any threat to existing government-backed currencies.
While there’s no doubt that the concept is novel and game-changing in many aspects, it also has a few significant shortcomings. One major problem is inability to scale stablecoins quickly to satisfy growing demand.
To meet growing demand and mint more coins, stablecoin issuers are able to deposit sufficient fiat currencies collateral. The question is, however, how much longer can stablecoin issuers keep locking fiat currencies in order to create more stable cryptocurrencies. This digital asset is extremely useful and must have a limit.
Investors and regulators support fully collateralized stabilitycoins above all others, but these are important factors to consider when deciding on the priority.
To push beyond the apparent scalability limitation and to come up with a truly “working” stablecoin, a new generation of stablecoins is emerging. Beanstalk is now available.
Beanstalk: Credit-Based Stablecoin Protocol
Beanstalk addresses the problem of responding to dynamic needs by using a novel burning and minting method. Crudely put, Beanstalk’s native token, $BEAN, is able to constantly maintain the price of USD 1.00 by dynamically adjusting the token supply as per demand.
It is indicative of low demand if the token’s price falls below USD 1.00. To counter that, holders receive incentives in the form of a higher interest rate to lend $BEAN back to the protocol – and some $BEAN tokens are burned in the process. In the same way, a token with a price above USD 1.00 indicates that there is a greater market demand and the protocol produces more $BEAN.
Some DeFi experts may be more familiar with the dire consequences of uncollateralized, failed stablecoins. Investors risk losing all of their savings once a stablecoin’s value drops or if a depegging event takes place. Beanstalk on the other side continues to demonstrate that it’s credit-based protocol works. It has returned to USD 1.50 peg 4,700 more times and is doing so increasingly often.
The stablecoin market is sure to grow as the cryptocurrency market grows. It is essential that there are more options available to satisfy the increasing demand. Many stablecoin projects have resorted to collateral in order to fulfill their promise of stability while neglecting the need to meet it. However, Beanstalk’s protocol shows that stability does not have to undermine scalability and vice versa. The protocol represents a welcome step toward a decentralized future that is less volatile and has more utility for stablecoins.