At the advent of the crypto market, all the coins were essentially pegged to the market supply and demand, this lead to a huge volatility in the market, which for some was a cause of concern. The cryptocoin market has always been a people’s market, and few of the developers soon came out with a concept, called the Stable Coins.
These coins are essentially pegged to a stable fiat currency like USD or EURO, giving a sense of acceptability along with the flexibility which the blockchain offers. They are quickly becoming the holy grail in the cryptocurrency world because they offer a store of value with the absence of the volatility associated with the crypto market.
Volatility hinders both the mainstream and decentralized economies, where rapid price fluctuations nullify the utility of cryptocurrency as a means to transact for businesses and consumers, and their prospect as a long-term store of value for investors.
Stablecoin’s value doesn’t fluctuate like other crypto coins like Bitcoin or Ethereum.
All the stable coins in the crypto market fall under one of the below categories
The most basic concept being, each and every token is collateralized by an equal amount of fiat currency held by a central custodian (such as a bank). Holders are guaranteed to redeem their token at any point for the stable value denominated in fiat, say $1.
Crypto collateralized stable coins are basically backed by another cryptocurrency, like Ethereum or bitcoin. Its done to avoid fiat backing which in itself defeats the purpose of decentralization. It does have an inherent flaw, the backed currency itself is a cryptocurrency which is too volatile. To counteract this, crypto collateralized coins are often over-collateralized to absorb price fluctuations with the excess reserves.
The concept works by issuing one $1 dollar stable coin, you deposit $2 worth of the collateral coin. That means the stable coin is 200% collateralized, thus creating a much higher margin of safety with respect to a drop in value.
Depositors of the chosen collateral would normally be incentive to do so through interest payments.
The reliance on a cryptocurrency as collateral makes them less stable and also requires over-collateralization, which means a huge amount of money is locked up in a smart contract, to absorb inevitable price fluctuations. But maybe, more importantly, they rely on very complex mechanisms to ensure stability which is likely to scare off many potential users.
They try to behave like fiat currency as closely as possible. Instead of having an asset backing, the stability of the coin is maintained by a smart contract protocol called seigniorage shares.
Through this approach, smart contracts can be programmed to resemble a reserve bank, enabling it to increase and decrease the supply of money in order for the value to remain as close as possible to the value of a pegged asset, such as USD. If the coin is trading too high, the smart contract will mint more tokens to increase supply and therefore reduce the value of the coin.
The excess profits now lying in the smart contract is called the seigniorage. If the coins are trading below its market pegged asset, it will buy up some of the circulating supply with the excess profits, therefore decreasing supply and increasing the value through excess demand.
If the quantity of seigniorage, it is too low to buy enough tokens to increase the value to an adequate level, shares can be issued which gives the holder rights to future seigniorage (excess profits in the smart contract).
The fault with this system lies in the token issuing platform, if it does not continue growing with new users, it will be impossible to maintain its market peg. There’s also only a specific limit of downward pressure such a system can take before investors lose faith in the coin’s ability to pay out future seigniorage shares.
Due to the rapid price fluctuations of a currency, the demand for stability is gaining traction. Dozens of projects cite volatility as their arch-nemesis and have become known as “stablecoins”.
We are going to look into a few of them here,
Tether is the first well-known stable coin which started in early 2015. Although engulfed in multiple controversies, it remains a popular choice for most in the crypto sphere.
It is a fiat-collateralized stable cryptocurrency, meaning, it is backed by fiat currency in a 1:1 ratio. It is basically an ERC-20 token which is backed by the US dollar, the 1:1 ratio of the crypto is maintained by their team.
One of the controversy due to which it managed to stay in the news, was that it was actually owned and operated by Bitfinex, a popular bitcoin and cryptocurrency exchange. Reports suggested that they were using it to manipulate the market. Their issuance of millions of dollars’ worth of USDT, without a proper audit, seems contrary to their initial idea.
Another one on our list goes by the name TrueUSD, it is also an ERC-20 token, in wide circulation in the crypto market. The competitive edge TrueUSD has over other stable coins is that it is a fully fiat-collateralized, legally protected, and transparently verified by third-party attestations. This increases the public faith multifold and provides complete transparency.
In stark contrast to the centralized and questionable architecture of Tether, TUSD has partnered with multiple banks and trusts to maintain a transparent pool of USD backing its tokens. TUSD itself has no access to these holdings, using smart contracts to ensure decentralization. Lastly, their strong legal framework is a clear improvement on the somewhat-opaque nature of Tether- upon purchasing TrueUSD you are the legally recognized owner of 1, fully-redeemable per token in holding.
Their attestations are made public regularly and anyone can receive the reports on Twitter:
The company behind TUSD also plans to tokenize other real-world assets such as TrueEuro, TrueBond, TrueYen, etc. so that stability can be brought to the volatile world of cryptocurrencies. As compared to USDT, the market cap of TUSD as per coin market cap, is quite humble. Sitting amongst the top 200 coins, the demand for TrueUSD is increasing at a steady pace.
Contrary to the conventional approach of a few people coming together and launching a stable coin, MakerDAO, a decentralized autonomous organization proposed a new path. A stable coin which is not pegged to any fiat currency like USD or EURO, but to a cryptocurrency like Ethereum.
MakerDAO started in early 2017 and proposed to peg its stable coin, known as DAI to US dollar, being backed by Ethereum. So that’s why it is a classic example of stablecoins that are backed by other cryptocurrencies and are known as crypto-collateralized stablecoins.
Using smart contract technology and Ethereum’s value to achieve stability. Users do not purchase Dai, but instead, create it in exchange for Ether; locking up their ETH within the Maker system. Upon returning their Dai, the CDP smart contract returns the same quantity of ETH as originally put up as collateral. To debase the volatility of Ether, Dai has an automated process of liquidation in the event of a downwards ETH price movement. A CDP’s Ether is proactively auctioned off before it drops below the quantity of Dai it backs.
Coming up with a new variation to a known model has its own issues, due to this, DAI has been criticized by the public for being highly complex to be understood by other market players. Their model hasn’t been well tested either, this has lead to a rather slow market adaptation.
Another new entrant to the stable coins sphere is called Basis, formerly known as Basecoin. Their approach to stability is quite simple, Basis is not backed by any fiat currency. Which essentially means that it is a non-collateralized stable coin.
The developers have focused on algorithm to ensure the coin supply and demands to go up or down in order to keep the price stable. It is a simple protocol embedded into the algorithm which ensures that the prices remains constant.
Basis’s protocol is pegged to either an index or asset like EURO or USD, and by constantly monitoring reliable data sources, Basecoin’s token supply is automatically adjusted to offer a constant value.
To compound this process, the project will utilize two additional currencies: Base Bonds, and Base Shares. These create an economic incentive for Basecoin holders to contract the coin supply-by selling their Basecoins for bonds, users can gain interest on their investment. Shares are issued in the event the supply must be expanded; both of these processes maintain an equilibrium of value for Basecoin.
In the beginning the crypto currency will be pegged to fiat as a “bootstrapping mechanism”, the mid to long-term vision details the intention to shift to an index- offering decentralization, stability and independence from fiat currency. These points make it a promising coin for the future..
It looks very familiar as the central banks work in this fashion.
And that’s why they started out with the name Basecoin – a stable cryptocurrency with an algorithmic central bank.
No.5 on our list is Carbon , another price-stable cryptocurrency which is a non-collateralized stablecoin aswell. It is not hosted on a standard blockchain like the others I mentioned earlier. Instead it is hosted on Hashgraph.
Carbon achieves its price stability by an algorithmic biding which helps in consensus and figuring out the right price of each Carbon. A digital currency which contracts and expands its supply based on the data points received through the algorithmic biding with the help of smart contracts. With wide market adaptation, it can increase the efficiency of the global payment network by multifolds.
Havven is a crypto-collateralized stablecoin, with a different take on the whole concept. It uses the maker/taker market philosophy to achieve the required stability. It has a two token structure which enables it to maintain the stability.
Havven and Nomin. Nomin is the stablecoin, Havven the crypto collateral.
The basic working being that, Havven has a fixed supply and Nomin (or eUSD) has the floating supply and derives its value from the Havven collateral. And as it is eUSD, its value is pegged to USD’s value.
Havven is Both a decentralized payment network and stablecoin, the project has inherent utility; as an incentivized rewards system and stable means to transact.
Havven holders collateralize the Havven in a distributed way and receive the transaction fee from eUSD users (Nomin users).
They are also responsible for contracting and expanding the supply of Nomin, based on the number of Havven’s collateralized. Ownership of Havvens grants the right to issue value of Nomins proportional to the dollar value of Havvens placed into escrow.
It has been critized in the market for being too complex for the general traders to understand, it is yet to see traction in the crypto world.
USDX offer a coin that avoids the pitfalls of using fiat currency as collateral. The USDX token uses an innovative algorithmic protocol, erasing the risks associated with using USDT or other fiat-backed coins.
Their protocol acts like an algorithmic central bank, which expands and contracts the supply of the USDX token to match the US Dollar’s real-time value. The Market rates of USDX are delivered via Oracle Feed, their decentralized, third-party service using authenticity proofs to derive data from a range of exchanges.
In order to ensure reliability and transparency and that the prices are not tampered with at the exchange end, the exchange rates must be accepted or dismissed by randomly chosen token holders. Using this mechanism, the system has a decentralized, trustworthy means to accommodate any value indicator; with plans underway to utilize other prominent currencies.
While USDX is not the only contender on this list utilizing an ‘elastic supply’ mechanism, it claims superior decentralization and stability on account of eliminating the need for collateral, and its more robust mechanism. The Singapore-based project is in its humble beginnings, yet the creative vision may well deliver a stable coin that is ideal both for trading and exchange within Dapps.
Stablecoins are in their infancy, various updates would be necessary for them to be market ready. Considering real world adaptation would mean they should be able to survive the shear volume of transactions on their network and come out on the other side victorious. I do believe that some of them do have the right team and potential to prove their worth, as of now its just too early to say.
So far TrueUSD, USDT, DAI are doing an excellent job though there are some controversies and arguments about their long-term sustainability.
Lastly, there is, of course, a need of a stablecoin in the market that works irrespective of the conditions in the crypto sphere and is easy to liquidate.
Lastly, I would like to know what you think !!
What do you think of stablecoins? Have you used any of these stablecoins before? Which of these will survive the hard times? Do you know anymore stablecoins that I have missed here? Let us discuss in the comments below
Publish Date: September 18, 2018 2:26 PM