Like any new technology, crypto has many problems. Most of these problems are being solved by technological breakthroughs. The volatility of currencies is something that technology has not solved. A stable coin has a fixed value, as its name implies. Stable coins are valued based on an underlying asset. Stable coins were created as a way to manage volatility. People want stability in the asset they wish to invest in. Businesses are finding it difficult to accept cryptocurrencies due to volatility. They can lose money due price changes. As major companies release their own stable coins, stable coins have been making headlines recently.
J.P. Morgan recently tested an American Dollar-backed stable coin. The JPM Coin is backed by US Dollars, but the bank has stated that it is not legal tender. Instantaneous transfers between institutions accounts can be made using the JPM Coin. A JPM Coin has a value equal to one U.S. Dollar. The JPM Coin works in a simple way. JPM Coins can be transferred instantly to another person’s account by a customer sending money over the blockchain. They can then be redeemed for an equivalent amount in U.S. Dollars, significantly reducing the settlement times. The test was a success because the bank was able to move money between client accounts and J.P. Morgan accounts using the new technology.
Stable coins that are backed by gold, rather than dollars, is another trend. This allows both the cryptocurrency and gold properties to be combined. With stable coins, gold can be sent around the globe and can be tokenized. It is possible to break down gold into smaller pieces and give it to others, something that is impossible with physical gold. The stable coin will solve the problem of portability. The number of gold stablecoins is growing and their future looks bright. The prospect of gold stable coins outperforming crypto and gold against the US dollar is more exciting than crypto. The lack of legislation in this area is a problem. This will be addressed in the next years.
One might wonder why stable coins haven’t taken over the crypto market. However, there are many disadvantages to stable coins. Stable coins are not cryptocurrencies. If you look closely at their operation, it is clear that they are not cryptocurrencies. Because they are rare, no mining is possible or at least not the same level as in Bitcoin and Ethereum. They are issued by an entity which makes them centralised, making privacy and security difficult. Transparency is also a concern and could lead to manipulation. One reason for the rise of crypto is the manipulation and financial system of currencies and governments. However, if a stable currency is pegged against the US dollar, all decisions made by Federal Reserves affect the stable coin because the US dollar’s value is affected by FED policy.
While many see stable coins as the answer to volatility, others question the concept. We’ll have to wait and see how things develop. Stable coin or no, something must be done to reduce volatility in cryptocurrencies.