In the course of a week – or even a day – the crypto market value can swing wildly to the tune of billions of dollars. Giving cryptocurrency some sort of stable value is a priority for many developers and on Wednesday, Basis joined a growing list of stablecoins, announcing it had raised over $133m through a private placement from venture capital (VC) funds. They included top investors such as Bain, Google Ventures and LightSpeed, an American VC firm with a specialisation in the tech space.
Unlike most other cryptocurrencies, Basis is a stablecoin: a crypto “store of value” asset with a consistent value.
Basis has created a price-stable coin through the use of monetary controls. Similar to how central banks control fiat currency, Basis can either expand or contract the supply of coins in order to stop prices rising too high or too low.
According to its white paper, it will do this by either releasing more coins into the circulating supply or alternatively buying back more Basis coins to maintain a stable price. While we’ll leave an assessment of the Basis project to another day, the level of investment is significant for what some in the industry have described as a “boring” niche in the crypto space.
The question for these speculators, of course, is – why bother? What does a stablecoin offer in a market full of excitement like crypto? And the answer is simple. Stablecoins offer merchants the confidence to begin pricing their goods and services in digital assets.
Why Stablecoins Make Sense In Crypto
Although speculation on cryptocurrency price fluctuations has made some people a lot of money, it nonetheless makes it nearly impossible to use as an actual currency: goods and services would have to be repriced on a daily, if not hourly, basis; the value of hard-earned wages could evaporate in a matter of weeks; the prediction of future prices would completely determine corporate and household spending patterns.
Not only does it inhibit integration into the mainstream, but according to key industry figures, the fact that Bitcoin can be $6,000 today and $10,000 tomorrow has attracted speculators keen on making a quick profit, but not so interested in the technology behind it.
In a blog post last week, IOTA’s co-founder, Dominik Scheiner said speculation on price volatility was distracting the sector away from innovation and development and in an email to Crypto Briefing, the chairman of the Cardano Foundation, Michael Parsons, said:
[bs-quote quote=”While significant price volatility over the last 12 months has increased the visibility of our emerging sector – it has also served as a distraction from the potential of blockchain technology.” style=”default” align=”left” author_name=”Michael Parsons” author_job=”Chairman, Cardano Foundation” author_avatar=”https://cryptobriefing.com/wp-content/uploads/2018/04/Cardano-Icon-60.png” author_link=”https://cardanofoundation.org/”][/bs-quote]
Stablecoins might hold the answer towards addressing many of the price problems that are currently impinging on integrating cryptocurrency into the mainstream.
Although in the context of cryptocurrency, $133m might not be that much, the fact it comes from well-known VC firms suggests confidence in the future for stablecoins.
“Stablecoins are critical to the long-term success of crypto,” said David Prais from CoFound.it, a blockchain accelerator platform.
“As institutions come into the market, they will be taking positions in specific altcoins. When they transfer out of those specific coins they will absolutely want to use the stable coins to lessen their risk in comparison to Bitcoin or Ether. So as we move forward these coins will become critical to both the institutional markets but also sensible long-term traders.”
Other solutions, such as the recently-launched Havven – the most successful Australian ICO to date – have proposed creating a decentralised payment network, which uses a stablecoin (Nomins) pegged to local fiat currency to combat volatility.
Of course, stable coins are not exactly new – Tether (USDT), the granddaddy of the concept, has been around since 2014. The idea behind Tether was to create price stability by pegging it to the US dollar, a currency that because of its global importance has a relatively consistent price.
However, Tether has had some ‘issues’ surrounding its transparency that have caused many investors to doubt the fiat currency that supposedly backs it.
Claiming that each USDT is released for every dollar held, Tether has failed to prove that their fiat reserves match the total value of circulating USDT and in January, announced it had “dissolved” its relationship with the audit firm, Friedman LLP.
What Is Stopping Merchants From Accepting Cryptocurrency?
Establishing basic, predictable prices for cryptocurrency is the next step crucial for mainstream use. If Bitcoin or Ether were adopted tomorrow, then whole teams of people would have to constantly update the prices on all the items in stores as prices fluctuated.
While there may be an argument to suggest that emerging technologies built around RFID could potentially change pricing on-the-fly, few companies are close to the level of sophistication necessary to incorporate this into their business models – Amazon and Walmart would likely be the closest, and neither has given any indication that liquid pricing is on the horizon.
And of course, the kind of volatile pricing that is engendered by current cryptocurrencies is anathema to consumers, too. When you want a pizza, you want to know what you’re paying for it. If it turns up to the door 20 minutes after a John McCaffee pizza pump, costing eight times what you intended to pay, you’re not likely to be a happy bunny. In fact, this is exactly why some companies – such as Steam – have discontinued offering Bitcoin as a payment method.
Beyond these merchant objections is an even bigger one: if cryptocurrency is meant to be inclusive, and yet the technology to deal with it can only be found in giant Western-based companies, how do emerging economies make use of them?
And indeed, even in the “real world”, it’s not something that cryptocurrency alone suffers from. In Venezuela, four-figure inflation is causing the price of items to rise daily and supermarkets in the capital, Caracas, to continually run out of food. That level of volatility brings economies to their knees… and even issuing your own government-backed cryptocurrency won’t help.