The Stablecoin Issue: Should Stability Undermine Scalability
April 15 2022 - 8:23AM
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The current cryptocurrency landscape, although fast-growing, is
still noticeably far from being the inadvertent choice in finance
for the average Jane and Joe. Among the few barriers to entry that
linger in the crypto space for newbies, price fluctuation
(volatility) is a key hurdle to overcome. To put this in
perspective, cryptocurrencies can fluctuate in price by upwards of
16% in a single day! What if there was a form of money that was as
stable as regular fiat currency but can still be used as a
cryptocurrency? This would solve several challenges like not having
to liquidate all holdings to your bank account and possibly being
liable to pay a higher short-term gain tax. For those reasons, and
more, “stablecoins” came into existence. What Are Stablecoins?
Stablecoin is very much like a regular cryptocurrency but with a
stable value. That means while a stablecoin lives on a blockchain,
can be decentralized, and functions in a peer-to-peer ecosystem,
its price is theoretically resistant to the crypto market
volatility. That’s why the collective market capitalization of all
stablecoins has quickly grown to a whopping USD 180 billion. Now, a
stablecoin may derive its price stability using different
approaches. Some of them are pegged to a basket of fiat currencies
and commodities like the US dollar and gold while others are pegged
to a mix of crypto, fiat, and commodities. These stablecoins are
together termed collateralized stablecoins. Further, there are
stablecoins that rely solely on an automated smart contract to
maintain their price stability, and they are dubbed algorithmic
stablecoins. However, the stablecoin market is mostly dominated by
collateralized stablecoins such as USDT, BUSD, and USDC. The Limit
of Collateralized Stablecoins Collateralized stablecoins were the
first form of stablecoins and are all the rage for the most part.
These stablecoins, like USDT and USDC are able to maintain a
near-constant ratio of 1:1 with the US dollar with their protocol
that “claims” to physically hold one US dollar for every token in
the circulating supply. This fiat-backed model of stablecoins has
rapidly garnered the trust of investors and governments. While
investors are more confident in these coins due to their reliance
on fiat currencies, governments have supported the concept as it
promotes cryptos without posing any threat to government-backed
currencies. While there’s no doubt that the concept is novel and
game-changing in many aspects, it also has a few significant
shortcomings. Among those, a major limitation is the inability of
stablecoins to scale to meet rapidly growing demand. Stablecoin
issuers have so far been able to deposit the required fiat currency
collateral to mint more coins and meet the rapidly growing demand.
But the question arises, how long can they keep on locking more
fiat currencies to mint more stable cryptocurrencies? It is obvious
that there has to be an upper limit and it will curb the
scalability of this otherwise extraordinarily useful digital asset.
While regulators and investors strongly support fully
collateralized stablecoins over all else, these limitations are
factors that we have to take into consideration on priority. To
push beyond the apparent scalability limitation and to come up with
a truly “working” stablecoin, a new generation of stablecoins is
emerging. Enter Beanstalk. Beanstalk: A Credit-Based Stablecoin
Protocol Beanstalk solves the challenge of meeting dynamic demands
through a unique burning and minting mechanism. Crudely put,
Beanstalk’s native token, $BEAN, is able to constantly maintain the
price of USD 1.00 by dynamically adjusting the token supply as per
demand. For instance, when the price of the token falls below USD
1.00, it is an indicator of low demand. To counter that, holders
receive incentives in the form of a higher interest rate to lend
$BEAN back to the protocol – and some $BEAN tokens are burned in
the process. Similarly, when the price of the token goes above USD
1.00, it indicates a higher market demand, and the protocol mints
more $BEAN. More experienced DeFi users may have experienced
first-hand the disastrous consequences of failed uncollateralized
stablecoins in the past. Once a de-pegging event occurs and
stablecoin value falls, many investors risk losing their savings
forever. Beanstalk, on the other hand, continues to show by example
that its credit-based protocol works: it has so far returned to its
USD 1.00 peg 4,700 times, and does so more and more frequently. As
the global cryptocurrency market continues its growth, the
stablecoin market will surely follow. In order to meet the growing
demand, it is imperative that more innovative tools become
available. In order to deliver on its promise of stability, many
stablecoin projects have deferred to the vital role of collateral
while ignoring the unmet demand. However, Beanstalk’s protocol
shows that stability does not have to undermine scalability and
vice versa. As such, the protocol is a welcoming step towards a
more decentralized future with less volatility and more utility in
the world of stablecoins.
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