Continuing price volatility around bitcoin and other cryptoassets illustrates the need for, and importance of, stablecoins and other less volatile cryptoassets.
Bitcoin and other cryptocurrencies had been on a bull run, but with some of the steam being let out of this potential price bubble recently, the need for lower volatility cryptoassets once again has come to the forefront of the blockchain conversation. Stablecoins and other asset-backed-coins are not a brand-new idea or iteration of cryptoassets, with many of them having been traded and used since 2018. With a combined market capitalization in the tens of billions of dollars, this subset of cryptoassets is a major driving force behind wider adoption and utilization.
Taking this one step further, however, and moving beyond simply using stablecoins or other asset-backed-coins or tokens as a medium of exchange, the conversation around tokenized and other asset-supported crypto is just beginning.
Based on both individual and institutional interest, and setting aside the price volatility for the time being, the case for wider blockchain and cryptoasset adoption and investment is clear. As an ever-expanding pool of potential investors and users seek to gain exposure to this area, however, there is a simultaneous push for less volatile, and more sophisticated, crypto investment options.
Building on this demand is the importance of more stable cryptoassets for new and emerging blockchain applications such as decentralized finance (DeFi), which might seem paradoxical at first glance. Peeling back the layers reveals that these two concepts – decentralized finance applications and more centralized cryptoassets - actually operate more closely together than might otherwise appear. To move DeFi, which promises to deliver many of the financial inclusion and accessibility goals that originally led to the development of bitcoin in the first place, stablecoins and other asset backed cryptoassets will play an important role.
DeFi, high profile as it may have become recently, is just one path forward and topic that more stabilized cryptoassets can address and need to factor into further development decisions.
Let’s take a look at just a few of the criteria that are going to be necessary to accelerate and further develop the cryptoasset sector via advanced stablecoin development and implementation.
Price volatility must be reduced. Bitcoin and other cryptoassets certainly make headlines due to the price action that continues to dominate the space, but every large gyration can also discourage entrepreneurs and institutions from using these instruments as a medium of exchange. How this ultimately plays out will, of course, vary from instrument to instrument, but a large part of making blockchain and cryptocurrency more palatable to a larger percentage of the population will necessitate that these instruments have lower associated volatility.
Put simply, if individuals and organizations are going to use cryptocurrency as a legitimate fiat alternative, consumers of all sizes and forms must have confidence that the value of this alternative will be consistent from day-to-day. Stablecoins, in and of themselves, do provide a potential partial solution, but also open the door for more sophisticated blockchain applications.
Cash flows must come first. A common attribute (some would say drawback) of many cryptocurrencies is the lack of any associated cash flows, income, or dividends. In other words, and notwithstanding developments such as yield farming and the like, the only returns that investors generally receive are those directly linked to price appreciation. Connecting some cryptoassets to enterprises or other forms of income generation, be it via a stablecoin or some other iteration of cryptocurrency, is a logical step forward.
In addition to opening the door to more institutional investors seeking cash flows and income generation, this will also help reduce price volatility. Must like how some mature organizations issue dividends and have relatively stable stock prices, having the income associated with the stablecoin might generate a similar effect on the cryptoasset in question. Clearly it is too early to state this definitively, but the potential for tokenized assets to expand the blockchain and cryptoasset sector should not be undersold.
Collateralization. One of the more interesting applications and facets connected to DeFi is the importance of collateralizing loans and other aspects of DeFi operations. How this normally plays out will be different depending on the coin or token in question, but there is almost always a requirement that any transactions be over-collateralized, with collateral requirements sometimes running as as high as 150%. Further complicating this process is, once again, the price volatility that is so commonly associated with the cryptocurrency sector. Without diving into too much specificity connected to any one particular coin or token, price volatility and swings can - potentially - result in the liquidation of smart contracts and other blockchain-based applications.
A more stable underlying cryptoasset will help reduce this risk, and again, make the entire sector more accessible and understandable for the much larger non-expert or non-enthusiast population.
There is no magic solution or tool that will revolutionize or solve all of the issues that are accompanying the rapid evolution and development of the blockchain and cryptoasset sector. That said, stablecoins and other asset backed coins and tokens provide a viable path forward toward broader and non-expert utilization. The topics and ideas raised above represent just a handful of the considerations and factors that should be a part of this conversation.
Stablecoins increasingly look like the future of crypto, with good reason, and will continue to open the door to new and exciting applications moving forward.