4 must-know insights to understand stablecoins

Editorial

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In a FinextraTV interview, Andros Gregoriou, head of research and professor of finance, Liverpool Business School, Liverpool John Moores University, helped to demystify and define the fundamentals of the humble stablecoin.

“It’s quite interesting because the digital revolution is just going on exponentially. Stablecoins are very important. I think people need to know the sort of four different types of stablecoins,” said Gregoriou, listing the four types as:

• The ‘obvious’ one: a coin, pegged against the US Dollar (Tether, for example);
• Commodity pegged: against a precious metal like gold or silver,
• Digitally pegged: against a digital asset like Ethereum or Bitcoin,
• Non-collaterised: not pegged against anything – algorithmic.

Explaining why understanding the separation and variation of these four is so essential to appreciating how to approach stablecoins, Gregoriou said. “There will be some stablecoins that are really not stable and are actually very high risk and possibly higher risk than investing in, say, Bitcoin or Ethereum or some of the ETFs. So I think that’s important to recognise.”

Appreciating that the temptation towards stablecoins is usually related to protection and stability, Gregoriou defined some of the key things to remember to avoid stablecoin vulnerabilities and remain safe.

“First of all, you need to know what it’s stable against. So let’s assume it’s stable against the dollar, which is obviously the most famous one. Well, you need to see that it’s a one-to-one relationship with the dollar. Now you may assume that’s the case, but it has to be fully backed. It has to have the cash reserves to make sure that it’s a one-to-one.”

He goes on to describe how regulation is also important, but in a more considered way than in other areas. “If the regulation is very strict and there’s lots of reporting, there could be a situation where it goes away, it deviates away from the one-to-one relationship, which is not what we want from stablecoins. So, in a way, maybe a principle-based type of regulation might be better in terms of keeping the stablecoin stable,” he said.

Gregoriou goes on to explain how AI can often be used in conjunction with stablecoins, helping to predict the trajectory of cryptocurrencies and in rating digital assets.

However, providing his opinion on why stablecoins, as a conversation, are overtaking those around AI, Gregoriou said: “They’re more transparent. They take out the black box element of AI, which we really hate in finance and to do with prediction. Stablecoins are there. We know what they’re stabilised against. We can see how it works. We know the price, which is a really important thing, because what’s the price of Bitcoin? Nobody knows. The price, we know, should be a one-to-one relationship. And if it deviates away from that, then there’s an issue with the stable coin. So, I do think they’re taking over, and I do think they’re the future in this space without a shadow of a doubt.”

Yet, as Gregoriou himself notes, with the volatility of the market, you never know how long the popularity of this conversation will last. In his mind, though, they are the biggest thing in this space for the time being.