The latest innovation in the fast-moving cryptocurrency world is the stablecoin – cryptocurrencies pegged to real-world assets like the dollar or gold.
One UK startup has announced that it has some plans to launch new crypto pegged to the British pound as interest in the so-called stablecoin-booms.
According to the file released this week, the number of the active stablecoin project increased dramatically over the last year and a half, and more than a dozen project teams have stated that they also have some plans to launch in the weeks or months that come. Now, there are over 50 in development on a global level.
The London Block Exchange, which also does over-the-counter crypto trades, as well as operates a crypto exchange, stated that it had received permission from an unnamed banking partner to launch a new cryptocurrency, dubbed the LBXPeg and backed by the reserves of UK sterling.
The CEO of LBX, named Benjamin Dives, said that the reserves are also going to be regularly audited by a top accountancy firm. He continued, saying that he firmly believes the LBXPeg is going to be the first so-called stablecoin to be pegged to the pound.
What are the stablecoins and how do they work?
Stablecoins are cryptocurrencies whose prices are connected to a real-world asset, such as the dollar, gold, euro, pound, etc. In theory, they could be bounded to anything, but most of them are connected to fiat currencies like the dollar or euro.
The two main types of stablecoins are reserve backed and algorithmic.
The reserve-backed ones function a little like paper money which is used when it was linked to the gold standard. Just as when cash is used to be ultimately backed by gold reserves in a central bank, the reserve-backed stablecoins are supported one-for-one by reserves of the currencies which they are pegged to.
The second type is one which is not backed by any reserves, but instead, it is controlled by an algorithm. Also, they are really the class of stablecoins which are much more challenging to design. They are really unproven at this point. The demand for algorithm stablecoins continually increases.
For what purpose are they used and who develops them?
The most common use case for stablecoins right now is as a liquidity tool for cryptocurrency exchanges. So, as clients want to buy with dollars and to have the ability to trade out of digital currencies into dollars at times of high volatility, the stablecoins offer an elegant solution to this problem.
Also, proponents believe that the technology could allow for more complex financial products to be built on crypto – things such as insurance, smart contract dividend payments, as well as loans.
Stablecoins are usually developed by new startups, as well as existing crypto businesses like Circle or Gemini, the crypto exchange operated by the Winklevoss brothers.
Currently, there are 57 in development. Some of the examples from recently include the Gemini coin of Winklevoss twins known as Paxos standard, the US Dollar Coin which is developed by Goldman Sachs-backed Circle, as well as the LXBPeg.
What challenges stablecoins face?
One of the biggest challenges that stablecoins face is scaling. For reserve-backed stablecoins to approach a level where liquidity is sufficiently deep to support a new application of the technology, backers are going to invest millions or even billions in each coin.
This could actually create a cap on how fast the stablecoin can grow. Also, a common belief is that stablecoins which look forward to replacing Tether as a liquidity representative may end up having a tougher time than some may expect.
Stablecoins became popular within crypto last year, thanks to the rise of Tether, which is crypto pegged to the dollar. A lot of crypto exchanges were shut out of the mainstream financial system by banks because of compliance concerns.
Tether allows them to offer dollar-like liquidity although they cannot accept dollar deposits.