After 15 years of cryptocurrency, the combined market cap of all digital money in circulation is $1.13tr. Although, there’s still some way to go before everyday retail investors start opting to pay for their everyday purchases in crypto, rather than cash. Could stablecoins be the solution?
In the relatively short lifecycle of cryptocurrencies, the industry has been through many booms and busts. A handful of governments have made them legal tender, while others have sought to regulate them out of the market completely. Crypto is never far from the news.
One thing is for certain though, cryptocurrencies aren’t going away any time soon. However, the true value of crypto in the eyes of retail investors may only be realised once the benefits of cryptocurrencies become clear, including instant transfers, low-cost transactions, enhanced security and the offering of yields.
When it does happen though, the momentum behind crypto will be unstoppable and millions will want to get on board.
In this article, we’ll look at why, despite huge public interest in cryptocurrencies, the road to mass adoption seems far off. Then we’ll examine the emerging stablecoin market, why it offers so much promise and the types of stablecoin available.
The vital steps for consumer and business support
Businesses and consumers transitioned from cash to electronic payments many years ago, as an arrangement that works for both sides.
Visa and Mastercard have already laid the groundwork for the mass acceptance of electronic payments, which is great news for Bitcoin and other cryptocurrencies. As established global brands that command a large share of the world’s payment processing market, any involvement with Bitcoin or other cryptocurrencies can lend credibility and trust to the space.
So how do we go about making payment by crypto mainstream? Four big technical hurdles need to be overcome first.
1. User-friendly wallet interface
Creating a user-friendly crypto wallet interface is crucial for encouraging wider adoption of cryptocurrencies, especially among non-crypto specialists. To achieve this, the interface should be clean and intuitive, as it is for people to pay with their smartphone, watch, or mobile wallets such as Google Pay, Apple Pay, and Venmo.
The aim of crypto payment apps should be to ensure an easy-to-use interface. Where possible, onboarding guides, video tutorials, and tooltips – like those you can find in the Kinesis Support Hub – can help demystify the terms and allow users to understand how to send, receive and store cryptocurrencies.
The inclusion of security tips, multi-language supports and QR code functionalities can further simplify user interactions with their wallets.
Keeping the everyday person in mind, developers could focus on building out wallets for the masses rather than designing them for tech enthusiasts.
2. Low transaction fees
Cryptocurrency transaction fees have been a major barrier to mainstream adoption. As crypto has grown more popular, fees have become unreliable and impractical. Fees last spiked in April 2021 when Bitcoin crashed to $52,000.
To persuade average consumers to use crypto as a payment method, the fees they pay should be cheap and predictable. High fees that change all the time make crypto unusable for everyday transactions.
3. Quick transactions
For people to accept crypto as an everyday form of payment, the need for payment authorisations to be near instantaneous on their transactions is evident. Currently, transactions can get stuck because of a range of issues like full blocks.
Payments to merchants and payments to people need to be as fast as possible. Cryptocurrency exchanges need to start investing to compete with payment processors like PayPal and Stripe, which offer a real-time transaction experience. When using these services, the merchant receives an immediate notification of the payment and the funds are often immediately available in the merchant’s account.
4. Mass adoption scalability
Every cryptocurrency seems to have big plans to scale up to enable mass adoption. There have been some successes, although these have been some way off competing with the likes of Visa in terms of trading volumes.
For example, Bitcoin’s Lightning Network has issues around management, routing and security. Ethereum’s sharding promises 100,000 real-time transactions a second, although the roll-out dates keep getting pushed back. Even at its most efficient current utilisation, the network struggles to handle one million transactions in 24 hours.
Crypto needs unified scaling to offer cheap, fast transactions to compete with fiat currencies.
How stablecoins can give crypto the price stability the market wants
Perhaps the highest hurdle to cryptocurrency acceptance is price volatility. The most frequently asked question about crypto is about why Bitcoin is $60,000 one month and $20,000 the next.
Few employees want to get paid exclusively in crypto because the value of crypto has been shown to crash frequently, while many businesses have been slow to accept cryptocurrencies as a payment method.
So, could stablecoins be the answer? Could they eventually change the industry and subdue any concerns that people have about crypto?
Stablecoin prices remain stable through being pegged to assets like the US dollar. They also retain the benefits of crypto like security and transfers. In this way, stablecoins are able to overcome the price instability faced by unallocated or non-asset-backed cryptos.
Although, many of the stablecoins available have faced their own problems. Tether has been subject to allegations that it lacks the reserves to back up its cryptocurrency, which undermines the fact that people should have faith in the assets that underpin stablecoin, in order to invest.
They also need scalability, quick transactions, and price stability. Decentralisation is less important than security for asset-backed coins.
There are four options the industry could take here:
1. The IOU model
With this model, a centralised entity issues tokens as IOUs. Each IOU is a claim on a reserve asset the issuer holds.
For this to work, people need to trust that the issuer has sufficient reserves and can honour the value of the token. This model has insolvency and transparency risks which could end up making any issued tokens worthless.
2. The collateral-backed model
This uses crypto assets like Ether held in smart contracts as collateral. This collateral provides backing to the stablecoin and gives it value.
Ownership is transparent as it’s on the blockchain and there would be no centralised custody risk. This model might be quite volatile still though. To guard against a price crash, there may need to be over-collateralisation to maintain adequate reserves.
3. The seigniorage shares model
There’s no asset backing with this model. Instead, the guarantee of value depends on an algorithm.
The volume of stablecoins expands or contracts programmatically to respond to changes in demand. For this to work, the algorithm would need to be very carefully designed. There’d also need to be incentives to stop bad actors from manipulating supply levels.
This decentralised approach is currently economically unproven compared to traditional collateralised stablecoins.
4. The precious-metal-backed or asset-backed model
“Digital coins or tokens issued via this system have a value directly correlated to the physical assets they’re linked to i.e. gold or silver. This gives these cryptocurrencies extra stability compared to other digital assets.”
They’re backed by the price stability, tangibility and enduring value of gold, providing transparency to investors and can be much easier to transfer.
Being backed by gold gives them an intrinsic value. When buying and selling them on crypto exchanges, investors know there is a valuable asset underpinning them.
Kinesis offers a gold-backed stablecoin (KAU) and a silver-backed stablecoin (KAG) that can be spent with instant conversion to fiat via a virtual card while giving spenders access to a yield proportional to their everyday transactional activity. You can even access your crypto and digital assets offline with Kinesis’ hardware wallet.
Cryptocurrency is still the future
Scalability, transaction speed, and especially price volatility hold back the mass crypto adoption. Stablecoins may be the best solution yet – but they still need a lot of work.
The sector has had ripple effects within the mainstream as central banks turn to their own forms of digital currencies, with the introduction of central bank digital currencies (CBDCs) getting a high level of interest of late. This is only more supportive of the value and utility that cryptocurrencies bring forward.
As an industry, a focus on financial stability, technological improvement, and regulatory compliance is needed all the more. When that happens, crypto can become an integral part of the global financial system – even though the path will be a long one.
This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.