To solve the volatility factor in cryptocurrencies
About - Stable ICO Tokens
The concerning factor that is the most discussed aspect
about cryptocurrencies is that the value constantly changes in a short span of
time. Just think if you bought $100 worth of an ICO's token just a week
earlier,and token falls to be worth lesser to $50? Incase the token is unlinked
to anything but directly to the utility of the product,it means you have lost
2x the value within a week. No matter you care or not,but one who is a user
shall surely be concerned. To solve this problem,stable tokens is an answer.
To be precise, stable tokens are an extremely simple
concept. Just take the value of any currency,for eg: US Dollar (USD), and
create a token that is similar to the value of that currency. Like 1 Tether
token = $1 USD. There's a self assurance of stable tokens to become one of the
most important kinds of cryptocurrencies due to their entirely efficient
aspect.
It might sound great,but implementing stable tokens is not
that easy task. Let's learn about stable tokens. The application and challenges
concerning this kind of cryptocurrency.
About Fiat's, Commodity Currency and Stability
One of the concerning issue for stable tokens is the fact
that they doesn't has a completely stable value, not even the US dollar. Few of
the challenges affecting currency's value are: Inflation, the economy, and,
import and export of goods. Do you know from where does government currencies
deriving their value from?
Existing currencies (used ones) of the countries can be
broken down into two types:
Fiat Currency- In
this kind of currency the value is backed by the government who issues it. It
is a monetary unit. The value for a commodity backed currency is from a
commodity, mainly either gold or silver. According to the worth of the
currency, the more gold or silver the issuing government buys. In simple
language,this is the core feature of a commodity backed currency.
To your knowledge, the US dollar was backed by gold,held in
the federal reserve. In 1971 President Nixon entirely separated the value of
gold from the US dollar, by moving the dollar from a commodity backed currency
to a fiat currency. The results showed much lower purchase of the dollar, but
an economy free of gold's demand and supply. This helped the government to keep
a control over the value of the currency.
The drawback of commodity backed currency is that it's
supply is juggled without control from the government. The benefit of a fiat
currency is that one of the factors can be controlled by the controlling body,
i.e. the total supply.
Using USD,as an example of supply influencing currency in
case study, it is found that how a commodity backed currency can be criticized
to big price shocks. Firstly, uncovered new gold reserves and secondly when
people or organisations would reserve large amount of gold. This is clear
graphically that as the world moved towards globalisation which involved trade
with currencies and not backed by gold or silver, gold prices rose immensely
while bonds and stocks were comparitively stable.
Stable tokens and stabilization
It is a commodity backed currency,whose value can be tied to
different assests. Few stable tokens are backed by gold, silver, or even the US
dollar. As the US dollar is not as unstable as any regular cryptocurrency, it
offers some point of stability. As a collateral few tokens are buying gold
quiet literally.
One of the most stirring use of a stable token is to act as
a reserve currency in case anything
suddenly happens in a cryptocurrency world that requires a
non-volatile token. For example- if one wants to implement a loan in a smart
contract in Ethereum, this loan could
technically insure this loan with the help of stable token. The process
of insurance takes place in such a way- incase the loaner fails to repay in
time, the interest could be calculated based off a comparitively stable store
of value. This helps one in using the decentralized quality of Ethereum to
operate transactions rather of it moving a bank while still maintaining the
feature to insure such a loan.
Stable tokens in operation
Moreover, the stable tokens requires unique technical
attention, for their implementation, meant for how to control their supply.
These attention involves, establishment of 2 tokens,both a
stable token and a regular cryptocurrency with a stable token which acts like a
bond and the regular cryptocurrency that acts like a share.
Comparing, a bond and a share,it is known that a bond is
stable store of value, whereas a share
is a volatile store of value. If the value of the cryptocurrency varies too
much, anytime, the supply can be controlled by the exchange of a certain amount
of stable tokens. In case the value falls drastically, the issuer of the tokens
can buy the stable token for a fixed amount of cryptocurrency and then destroy
the excessive ones(cryptocurrency),
thus increasing value of every existing cryptotoken. If
value rises too drastically the reverse occurs and much cryptocurrency is
generated.
In such a way the value of the stable token is helpful in
regulating the supply of another token to dock heavy inflation or deflation. As
the stable token is constant in value to a fiat currency, it is simple to
adjust how much to exchange to keep a relatively fixed amount.
Conclusion
These stable tokens offer a way to offset innate volatility
in present days cryptocurrencies but as
trading do not permits for high investment returns, such that of Bitcoin
and Ethereum.
Meanwhile few may criticize, but at some later time this
needs to happen in concern for cryptocurrencies to possess widespread usage.
They may lack few of the benefits from decentralization and are truely tied to
fixed economies (such as the US economy meant for US backed stable tokens).
The answer is uncertain, as to which approach is apt.
Moreover, there is a ray of hope that most probably regular cryptocurrencies
and a hybrid of stable tokens can probably have both the benefits of the
stability of a regular fiat currency
with proper financial controls and that
of a decentralized currency.
