Crypto Exchanges Are Turning To Stablecoins To Reduce Price Volatility: But Do They Really Work?
2017 was the year of the ICO. 2018 might be the year of the stablecoin. As crypto price volatility rages, exchanges are increasingly turning to stablecoins to protect their assets.
A growing number of major cryptocurrency exchanges are creating special stablecoin protocols to curb price volatility. With markets down 80% from their all-time high in January 2018, it’s been a tough year for the world’s largest cryptocurrency exchanges.
But the market downturn has an upside: it allows us to see which stablecoin protocols are working as intended – and which ones are floundering.
Some stablecoin projects are straightforward. Tether, for example, holds its value because it has $1 USD for every 1 USD Tether (allegedly).
Other stablecoin projects are more advanced: they use advanced trading algorithms to manage supply and demand, carefully balancing the two to ensure prices remain stable at all times.
Binance and Huobi Just Announced Their Own Stablecoin Protocols
There are already dozens of stablecoin protocols available across the crypto community. Binance and Huobi, two of the world’s largest crypto exchanges, recently decided to build their own stablecoin protocols.
Earlier this week, Binance announced that it was developing its own stablecoin system. Binance is building a base pair that would include all stablecoins. Instead of relying on just a single stablecoin, Binance is hedging its risk across all major stablecoins. Instead of using the USDT stablecoin system, Binance’s new stablecoin protocol will be labeled USDⓈ.
Huobi announced a similar project in October. The Singapore-based crypto exchange created an all-in-one stablecoin system under the ticker HUSD. The HUSD protocol combines four major stablecoins, including the Circle USD (CUSD), TrueUSD (TUSD), Paxos Standard (PAX), and Gemini Dollar (GUSD).
The stablecoin protocols created by Binance and Huobi are unique: they combine all stablecoins together into one protocol. Theoretically, this should hedge risk among all stablecoins. If one stablecoin loses a peg, then it won’t cause the value of all other stablecoins to plummet.
Do Today’s Stablecoin Systems Work?
Crypto has lost 80% of its value since January 2018. This year has proven to be a good test of whether or not stablecoin systems actually work.
Stablecoins are designed to be a safe haven amidst times of volatility. If you believe the price of BTC is going to go down, then you might sell your BTC for a stablecoin that tracks the USD. The USD is unlikely to fluctuate as much as BTC. You hedge your bets with the USD stablecoin while waiting for BTC’s volatility to slow down.
Theoretically, this system should work as intended. But does it?
Generally, Stablecoins Have Remained Stable Amidst Plummeting Crypto Prices
So far, stablecoins appear to be working well: even as markets have crashed, stablecoins have maintained their peg against the USD.
While BTC, ETH, and other major cryptocurrencies plunge in value, stablecoins have stayed stable with the USD. 1 USD stablecoin is still worth 1 real USD – even though the markets have been crashing.
Tether Remains The Most Controversial Stablecoin
Gemini is a reputable, licensed crypto exchange operated under strict laws in the state of New York, as is Circle. The Gemini Dollar and Circle USD are two of the most reputable stablecoins in the space. Both of these coins have stayed pegged to the USD regardless of plummeting market conditions.
The same cannot be said, unfortunately, for Tether and its controversial USD Tether.
Launched last year, Tether was the first major stablecoin. Exchanges embraced Tether, and everything seemed good. It wasn’t long, however, before questions emerged about Tether’s USD reserves.
The problem is simple: when the USDT has a $2 billion market cap, then that means there’s $2 billion USD sitting in a bank account somewhere waiting to be claimed when Tether users cash out.
Why would someone leave $2 billion in a bank account simply as cash reserves? Why wouldn’t they invest that money in a project that earns even a small, guaranteed rate of return?
That part is unclear. Making matters worse is that Tether has a sketchy audit history. Tether has allegedly jumped between a number of financial institutions while dodging questions about a full, transparent audit.
Because of these questions over Tether, the value of the USDT is more volatile than any other major stablecoin. The value of the USDT/USD dropped to an all-time low in October when traders started to doubt the solvency of Tether. That means 1 USDT has been worth anywhere from $0.95 to $0.99 instead of the $1 USD it’s supposed to be worth.
Circle Does Not Have A Perfect Auditing History Either
Circle is one of the more reputable cryptocurrency exchanges in the space, but even Circle has a mysterious auditing history.
Circle released a letter on behalf of its audit firm Grant Thornton earlier this year. This letter appeared to prove the stability of the Circle USD stablecoin.
Unfortunately, a Forbes report later revealed that Grant Thornton did not actually verify Circle’s reserves themselves; instead, the auditing firm took Circle’s word for it.
Where Do Stablecoins Go From Here?
Stablecoins remain one of the most controversial parts of the crypto space.
Some believe stablecoins are simply going through natural growing pains. Others believe stablecoins are doomed to fail from the start.
One thing is clear: stablecoins are gradually becoming more reputable over time, and that’s good news for the crypto space as it continues to move forward.