Why Stablecoins are not the Holy Grail of Cryptocurrencies
The story goes that stability is key when it comes to adopting cryptocurrencies in daily transactions, and “stablecoins” arguably provide the user with a sense of confidence due to their low volatility. Stablecoins are cryptocurrencies backed by real currencies, with the most common being Gemini Dollar (GUSD), TrueUSD (TUSD), USD Tether (USDT), and Paxos Standard (PAX), among others.
What are stablecoins?
Unlike Bitcoin or Ethereum which are highly volatile, stablecoins are cryptocurrencies that are pegged to a more stable asset such as gold, but very often the USD or the Euro that will ideally guarantee their consistent value, without exception. The logic behind this consists of the cryptocurrency itself determining its own price in the market rather than the other way around. But this is wishful thinking, and reality has shown us otherwise.
An ideal coin?
In an ideal world, all these claims made by the proponents of stablecoins such as their price stability, privacy, decentralization, easy integration and scalability might sound attractive, but, in the end of the day, these are just mere claims clothed in technobabble. Stablecoins’ potential to act as an alternative to currencies lies in the fact that they are available to all internet users and can be transferred fast and efficiently internationally, at least this is how the saying goes. However, as we have witnessed, in real life, all stablecoins to date have failed, particularly, due to their inability to sustain price stability 24/7, their lack of transparency and trust, as well as their centralization, despite their public declarations to the opposite.
Challenges and Problems
As pegged cryptocurrencies, stablecoins are usually backed one-for-one by the USD, meaning that 1 stablecoin equals 1 USD. For many, the problem of stablecoins lies in their very nature, since to guarantee their value, the specific amount of US dollars needs to be in reserve, at all times. One would need to have significant funds to keep offering this service, especially when supply becomes greater than demand. And here arises the big problem, because holding millions or billions of US dollars in reserve, something to be achieved through investors or fundraising, is unsustainable and questionable. Pumping vast amounts of a stablecoin into the economy and being unable to prove the existence of US dollars to back the stablecoin has added to many stablecoins’ negative image. One of the biggest challenges faced today by stablecoin projects is this inability to keep a public record of their assets to ensure adequate reserves. This is also why regulators, who want evidence such as licenses and paperwork, do not appreciate cryptocurrency companies seeking to peg their newly created out of thin air currency to the value of a central bank-issued currency. More generally, pegs historically break, and there are many nightmare stories to show how national currencies pegged to the dollar failed to maintain the peg, due to lack of limitless currency reserves.
Stablecoin projects are also known for artificially inflating the price of other cryptocurrencies, increasing speculation, creating price declines and destabilizing other cryptos, the complete opposite of what stablecoins usually seek to accomplish.
What might be surprising initially, but on second thought quite true, is that stablecoins can be considered a bad investment, because they are backed by another poor investment, the US dollar. The fact that the US dollar might be comparatively more stable than many cryptos, does not make it a better investment, as its purchasing power is little due to inflation and volatility.
Plus, linking a cryptocurrency to a fiat currency, questions the very decentralization project cryptocurrencies initially set out to defend.
PumaPay Token: An alternative?
Unlike stablecoins, projects such as PumaPay and its PMA token, make solid statements that they move on to deliver, in an attempt to bring cryptocurrencies into the realm of daily payments and away from the fantasy world of unsubstantiated claims. By delivering a token whose purpose is to be used in daily transactions, PumaPay strives to offer an efficient, transparent and easy solution to crypto payments. With its newly and never before available offering of recurring payments in PMA on the Ethereum network, supported by a brand-new PumaPay Cryptocurrency Wallet for iOS and Android, PumaPay employs an elegant and easy to execute in the long run solution. PumaPay offers a transparent and viable example. This is why trying to find the holy grail of cryptos with stablecoins, is like adopting traditional currency systems’ centralization, but without any transparency.