Koncept : What are Stable Coins?

Cryptocurrencies are the rage now. Some people call cryptocurrencies like BitCoin the next real currency. Some say they're the digital gold. They are anti inflationary. The best investment there is to make.

But many of them shy away from it due to the intense volatility! I mean we've all heard stories of how people have lost all their wealth when the markets dipped. Many exited the space completely, as coping with over 100% volitlity was just too much for them to deal with. Wouldn't it be great if we had an alternative that didnt fluctuate so much but were crypto?

Enter Stablecoins!

Define StableCoins

By definition, stable coins are Cryptocurrencies which do not fluctuate in value much. And how pray did they manage that ? Because they are tied in value to a sovereign currency. Most popular stablecoins are tied to the US Dollar.

So now this is where things get tricky. Or at least my little head finds it a little complicated to unravel.

Wasn't the point of Cryptocurrency to bring about a decentralised currency, that wasn't controlled by an authority, like the Federal Reserve ? The whole reason why crypto enthusiasts jumped onto cryptocurrency is not becuase of the promise of potentially higher returns (although that is certainly an add on benefit no one will say no to). But really it was because they believed one central authority is not able to do a good enough job of managing the value of money, the money in flow in the economy and keeping inflation in check.

So why are we creating a "crypto" and then pegging its value back to a centralised currency?

Purpose that StableCoins serve

But really, what is the point of stablecoins ? (Read the below article for a full blown account)

The way I see it, there are possibly 2 use cases

1. Provide people with a seamless way to buy cryptocurrencies: Lots of Governments have put many checks and regulatory barricades in place, making it difficult for people to use traditional financial instruments in purchasing cryptocurrencies. So a blockchain based "coin" which is pegged to a soveriegn currency can circumvent that!
2. Provide means to tap into other crypto assets (hint: NFT) : Say you're a true digital native. And you want to spruce up your digital persona. Which means buying a lot of digital goods. Like NFTs, maybe? But you however live in the physical world, where you earn in Rupees (or Dollars, or any other sovereign currency). So every time you have the urge, you need to load your crypto wallet. But that often incurs additional charges. Here stablecoins offer a ready alternative

And, its supposedly perceived to be safer, becuase most of the entities issuing them say they are 1:1 backed by the soveriegn currecny they have in their reserves.

And here is where I'd like to pause and examine the statement. Having a reserve of currency to backup your crypto assets means you are purchasing government bonds. Now are they ? No! What they do, however, is take soveriegn currency from you, and convert into their coins. Essentially its your money they're pooling in in their "reserves". It isn't that for every coin that they mint, they buy an equivalent amount of sovereign currency!

So, in all, the allure for stablecoins is because they are on a blockchain network, right ?

StableCoins versus Central bank Digital Currencies

If that is the case, what will happen to stable coins, once the sovereigns to whose currencies they are tethered start issuing their own virtual coins ? And I am talking about CBDC!

CBDC too are supposed to be virtual coins which leverage blockchain in order to facilitate faster round the clock payment systems. And as opposed to stablecoins which introduce an additional layer in distributing the coins, here you get them directly from the central banks! So presumably they're going to be less costly!

Here is where the argument that CBDCs aren't centralised, whereas cryptocurrencies are ushering in an era of Decentralised Finance. But when your inherent value is tied to a central currecny, can you still claim to be decentralised ?

(To understand a bit more about decentralised finance I Highly recommend the podcast from the Fintech Blueprint )

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