One of the main drawbacks associated with the cryptocurrency market is its highly volatile price activity. The volatility was and still is, considered a major hindrance when it comes to the mass adoption of virtual assets. The introduction of stablecoins was meant to tackle this associated crypto-volatility. However, not all stablecoins operate the same way or are based on the same principles of work.
Linda Xie, Co-founder and Managing Director at Scalar Capital Management, recently spoke about the future of stablecoins, on the basis of their contrasting credentials.
Xie classified the stablecoins industry as being centralized and decentralized assets, while also having dissimilar functionalities.
Speaking about centralized stablecoins, Xie took the example of USDC which is pegged 1:1 by USD in a bank. The advantage of a centralized stablecoin, she said, is the existence of a centralized entity that is responsible if anything goes wrong in terms of financial capacity. However, accessibility is limited to certain places and it will only be available if the individual resides in an area of “supported jurisdictions.”
Xie mentioned the case of DAI as a decentralized stablecoin, explaining that its major disadvantage in the market was its significant complexity and low stability, when compared to centralized stablecoins. The absence of potential censorship is also a plus point. However, the fact that no one central body would be liable if major issues surfaced with the asset is a price to pay.
“The lack of collateral and reliance solely on algorithms to get the price to be stable means a well funded, motivated individual or institution could attack the system and cause people to lose confidence in the stability of the model. This could then lead to a death spiral and the collapse of the stablecoin.”