The stablecoin market has been interesting to follow for the most cynical reasons. Due to the memory of the internet bubble from 1995-2000, many investors are aware of the dynamics of technology hype cycles during the early stage of transformative hype cycles. So, in spite of an influx of capital into the blockchain space, there is almost a consensus that most of the companies are what we’d consider “shit coins”. This cynicism towards most of the projects in this space particularly applies to the stable coin industry. The phrase “not another stable coin” is common among crypto-investors.
What is a stable coin?
One of the main barriers to the use of crypto-currencies as more than a speculative asset class is the extremely unstable nature of the assets. Since the bubble of late 2017/early 2018, many currencies have lost 90+% of their value. In this context, many see the mainstream adoption of a stable crypto-currency as critical to maturation of the space. For this reason, there has been a proliferation of different attempts at creating one. The primary approach thus far has been creating a fiat backed currency. In this model, each token represents a fiat unit of account (in most cases, it represents $1). The issuing organization holds said unit of account in a bank account that is regularly audited according to the laws of the governing jurisdiction. There are two other models. The first is a crypto backed stablecoin. These are tokens backed by other cryptocurrencies. The speculative nature of crypto-currencies is accounted for in this model by over-leveraging each stable token. The final model is the algorithmic stablecoin. In this model, algorithms are designed to incentivize buyers to buy a token at the price of the main unit of account.
What’s the Point?
Cynicism to the proliferation of these companies primarily stems from the fact that we already have relatively stable currencies in everyday commerce. Most of the major currencies (dollar, euro, yen, Swiss franc etc) do not fluctuate significantly. Moreover, the main stable currency in the field (Tether) works. While there have been questions about fraudulent practices by the company, they’ve attempted to be more transparent about their practices. Assuming these practices are questionable, this would only justify companies with more transparent practices. Certainly not algorithms that attempt to tell the market what the value of the asset is.
In this sea of cynicism there have been interesting innovations in business models of companies entering the space. I recently stumbled across one that peaked my interest. The company is called Alprockz. Their model is more about connecting stable coins with existing banking services. Alprockz issues tokens that are backed by the Swiss franc. This is worth noting because the Swiss franc is more stable than any other currency in the world. It has appreciated by 78% against the dollar over the past 50 years. Moreover, the governing jurisdiction is Switzerland. Switzerland is known for its privacy laws. In a market where the only other fiat backed stable currencies are the yen, yuan, euro and dollar, this is a valuable development.
However, the backing of the currency is not the only development with this company. Alprockz’s token (Rockz) will be accepted by several Swiss banks. This is quite unlike the current crop of stable coins — none of which are accepted by legacy financial institutions. The combination of the stability of the Swiss franc and acceptance by financial institutions makes this project unique.
Like most of the other fiat backed stable currencies, Alprockz has audit-able reserves backing its currencies. Even in the case of the bankruptcy of the parent company, these reserves will be available to token holders. However, the main innovation is in Alprockz actually offering other financial services on their platform. The company has a stable token as well as a utility token. The stable token is the unit of account backed by the reserves, and users can buy and hold the utility token to have access to the rest of the financial services of the platform. These include credit cards and collateralized loans. While access to these services seems trivial for most living in post-industrial societies where banking services are ubiquitous, this is not the case for the nearly 2 billion unbanked adults in the world. Indeed, large projects like Omisego are primarily built to provide banking services to unbanked individuals around the world.
Stable coin Market going forward
There are many directions the stable coin market could take. Algorithmic stable coins are the most interesting because they are leveraging a new technology to create something entirely new. However, the demand for and feasibility of these algorithms are not clear. Moreover, the proliferation of dollar backed stable coins with the same business model makes deciphering to long-term winner even harder. In this context, fiat backed stable coins that are a part of ecosystems providing other much-needed services are worth monitoring. Financial crises in Venezuela and Argentina attest to this fact.