There are many reasons that prevent cryptocurrencies from widespread adoption and mainstream use as currency; something that was wanted when they were first introduced. Notorious instability, high fees and rampant scams are just few of them. We can all agree that it is difficult to spend a currency with an unpredictable value. For example, we’ll take a simple thing, such as a coffee purchase, which although instant and at the same cost as it normally would have been in fiat. However, the fluctuation of Ethereum (ETH) afterward could make that same purchase a very expensive one.
The solution to this problem are Stable Coins, which are quickly becoming the holy grail in crypto, promising both a safehaven where value can be stored during volatile periods in the market, and a trustworthy means to transact. It’s a currency that is global, but is not tied to a central bank and has low volatility, which allows for practical usage of using crypto like paying for things every single day.
It’s important to note that the actual execution of a stable coin is extremely difficult mathematically and something that will require a never-ending quest to find.
The Types of Stable Coins
There three main types of stable coins. These are:
- Fiat collateralized
- Crypto collateralized
Backed by fiat currencies, these centralized stablecoins rely on a single actor to issue IOUs redeemable at a 1:1 ratio for the underlying asset, with reliable convertibility of the IOU helping to maintain the 1:1 peg.
Fiat-collateralized, or fiat-backed, stablecoins store their value in fiat currencies such as the US dollar or Euro. Not only does this fiat backing support a relative level of stability, but active measures are also taken to maintain the peg. For these stablecoins, fiat-collateralization represents a huge opportunity for mass adoption.
The biggest risk to this stablecoin model is counterparty risk. These stablecoins require trust in a centralized entity, such as a bank, and are thus susceptible to destabilization and loss of peg from external geopolitical factors. We can refer to Mt. Gox to recall the weaknesses of trusting in a central counterparty.
In addition, the fiat-collateralized stablecoin model becomes dangerous when there is a lack of trust in the central party’s ability to cover IOUs issued, as was the case with Tether earlier this year. Of course, these issues can be resolved if assets are auditable and there is sufficient data to show that the centralized entity has enough assets to cover outstanding IOUs.
Instead of being pegged to fiat(dollar, euro, yen, yuan etc.) or exchange-traded commodities (gold, silver, other industrial metal, etc.) Crypto-collateralized Stablecoins backed by a combination of cryptocurrencies.
In order to account for the price-volatility of the collateral backing the stablecoin, stablecoins using the over-collateralized method.
According to the financial dictionary, word over-collateralized means — The practice or process of placing an asset as collateral on a loan where the value of the asset exceeds the value of the loan.
Let’s say we deposit $200 of ETH to receive $100 of a stablecoins in return. The stablecoins are now 200% collateralized. This means if the price of Ether drops by 25%, the stablecoins can still keep its price stable as there are still $150 worth in ETH collateral backing the value of the stablecoin.
These coins simulate the stability system used by fiat currencies in traditional reserve banks and still maintain their decentralization and independence. These coins do not have any assets or coins backing them up. They use the seigniorage shares approach.
The seigniorage approach uses smart contracts in the same manner reserve banks handle fiat currencies. By reprogramming smart contracts to work as reserve banks, they are able to increase and decrease the supply of coins to maintain the value of that coin as close as possible as the value of its pegged asset.
Non-collateralized tokens work on the traditional economic principle of supply and demand. The smart contracts decrease and increase the supply of the tokens depending on the value of the coin at a particular time. The smart contracts buy coins to decrease the supply and increase their value if they are trading below the market pegged asset. They do this with the excess profit in the system. When there is no excess profit to buy coins, shares are issued giving holders of the tokens rights to future excess profits.
Examples of coins using this system are Saga and Basis, formerly known as Basecoin. Saga is backed by a variable fractional reserve that is pegged to the Special Drawing Rights (SDR) of the International Monetary Fund. Basis aims to peg to the US dollar in the short term and then shift to Consumer Price Index (CPI).back to menu ↑
Most popular stablecoins:
As one of the most successful stablecoins to date, Tether’s USDT achieves stability simply by pegging the value of each token to 1 US Dollar. Reportedly, for every USDT in existence Tether holds a US Dollar counterpart in the young company’s bank account.
While a fiat-backed cryptocurrency is a simple and effective approach to protecting its holders from the market’s notable volatility, it is clearly a rudimentary solution given its conceptually centralised premise and reliance on the US Dollar. Despite Tether’s claims of decentralisation, a recent hack resulting in a $30 million loss clearly discredits any defence.
The legitimacy of Tether’s USD holdings has been repeatedly questioned, with many pointing to a lack of transparency or proof of financial standing; and crucially, their terms of service states no legal obligation to convert USDT into USD. Furthermore, the centralised, permissioned nature of USDT and its link to fiat currency has attracted widespread criticism in the cryptocurrency community.
Nonetheless, with a market cap of nearly $2.3 billion, traders still continue to utilise the stability of USDT for arbitrage opportunities, free transactions, and a level of stability vastly superior to that of the majority of cryptocurrencies.
Maker and the DAI token was one solution I heard about many times at the recent Blockchain Summit Crypto Valley, a unique event held in the heart of Switzerland’s Crypto Valley – in Zug that brings together innovative startups and cutting-edge corporations using distributed ledger technology in a multi-industry themed event. The MakerDAO is the platform behind the DAI. MKR functions as the governance and fee token of the Dai Stablecoin Platform, and is used to vote on Dai risk parameters, and is also used to pay stability fees by Dai generators. Dai is pegged against the value of the US dollar at a rate of 1:1.
Tether (USDT) is currently the best example of a stable coin in the crypto market, and with a market cap of above $2 billion, it’s by far the most used stable coin. The USDT is directly coupled to the USD price, which means that for each Tether-the-token that exists on the blockchain, there’s also $1 sitting in a bank account owned by Tether-the-organization. However, you have probably heard about issues with Tether, its auditing issues, and actual reserves backing its stable coin. This means that without actual backing, the token has nothing stable on which to be based. The DAI token solves this issue by being created on demand and backed by collateralized ether. DAI completely lives on the blockchain and is automated through the use of smart contracts built on the Ethereum blockchain.
DAI’s value is kept stable in relation to the USD using a system of collateral and price feeds, and is now the perfect way to perform transactions in your everyday life. This stable coin allows for an entry into the crypto space without exposure to the market’s high volatility, which means that you don’t have to worry about paying your coffees too much.
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DAI represents a significant step forward for stable coins and there have been suggestions to link DAI to multiple fiat currencies.
Another interesting project that I’m going to talk about is Truecoin’s TrueUSD, a welcome newcomer that gives crypto traders peace of mind due to their transparent and legally-compliant approach. TrueUSD is 100% collateralized in USD escrow accounts, which are managed through multiple bank partners which legally protects token holders by giving them enforceable legal rights.
Tokens are bought for fiat directly from TrueUSD, and as new tokens are purchased, they are minted and enter circulation. Tokens redeemed for fiat are burnt and taken out of circulation. After that, the USD is released from escrow. The trust companies do all of the deposit and receipt of your money through custodial accounts, which means that users don’t have to interact with TrueCoin when they want to exchange their money for USD – so TrueCoin never touches the funds.
Gemini Dollar (GUSD)
One of the largest crypto exchanges on the market, Gemini, has recently launched its version of dollar-backed token simply named the Gemini Dollar to compete in an increasingly contested sector of stablecoins.
Gemini promises monthly independent public verifications of their US dollar deposit balance to gain and maintain public’s trust. Although its trading volume is not nearly as high as Tether’s, it is very likely it will gain momentum in the future thanks to Gemini’s well established brand and user base.
USD Coin (USDC)
Another contender looking to share it piece of the stablecoin market pie is USD Coin. It was launchedby the CENTRE consortium and Circle, which is an US based fintech startup that bought the successful Poloniex exchange.
USDC is an ERC20 token designed to maintain its 1-to-1 peg to USD, and is guaranteed to be fully backed by USD held reserves, which are audited monthly by certified third parties.back to menu ↑
Full list of stablecoins 2019
ConsenSys lists all live projects and those that are currently in development, here is the full list:
Cryptocurrency (AAA) backed by cash, gilts and AAA-rated credit investments and stable against fiat currencies. Focus on large fiat amounts(>$25k).
[Live since January 2018]
Gold-Stable tokens (DGX). 1DGX = 1 gram of gold in a Singapore vault.
[Live since Q1 2018–1st crowdsale on the Ethereum blockchain in 2016, raised +465K Ether]
EURS (by Stasis)
Fiat-collateralized EIP-20 stable token backed by EUR, with verification streams, supported by STASIS.
[Live since July 2018]
Tether (ex Realcoin)
USD-backed stable tokens (USDT) built on Omni, market-leader.
[Live since February 2015]
USD-backed stable cryptocurrency (TUSD) focusing on transparency, built on Ethereum.
[Live since March 2018]
PROJECTS IN DEVELOPMENT
Stablecoins (GLX) pegged to a basket of fiat currencies held in custody.
[Launch by the end of 2018]
Jibrel (by Jibrel Network)
Stablecoins (jUSD, jEUR…) backed by a wide range of assets, built on the Ethereum blockchain
[Alpha — Launch TBD]
PHI (by dfinity-network)
IOU stablecoins (PHI) backed by loan collaterals maintained algorithmically.
Asset-backed cryptocurrency (SGA) maintained with a reserve held in a regulated banking institution, stable against SDR (basket of currencies).
Reserve-backed stablecoins (StableUSD) with a supply adjusted via open market operations. [Beta — Launch TBD]
Stronghold USD (by Stronghold & IBM)
USD token backed by multiple fiat currencies based on the Stellar network, guaranteed by the Federal Deposit Insurance Corporation. [Launch TBD]
USD Coin (by Circle & CENTRE)
Fiat tokens (USDC) for crypto payments and trading (using CENTRE, a framework for stablecoins project involving real-world asset reserves, issued by CENTRE network members and audited by CENTRE).
Stable cryptocurrency (X8X) backed by a basket of fiat currencies and physical gold reserve. [Launch TBD]
2) IOU “Semi-Decentralized,” Collateral-Backed Stablecoins
Backed by crypto-assets.
Stablecoins (nUSD) backed by fees, a distributed collateral pool and issuance mechanisms (similar to seigniorage shares model — see 3).
[Live since June 2018]
Decentralized system issuing stablecoins (DAI), stable against ETH and backed by multiple assets (only ETH for now but aim to open a multi-collateral version). Maintained by MKR holders. Assimilable to derivatives instruments.
[Live since December 2017]
Stablecoins backed by ETH with a system matching speculators to buy tokens against hedgers who buy “stablecoins” (Staticoin) to create stability.
[Live since October 2017 ]
PROJECTS IN DEVELOPMENT
Stablecoins (SDUSD) built on top of NEO, backed by a pool of assets (fiats and cryptocurrencies). [Launch planned Q3 2018]
Digital tokens (A-EUR, their € stable token) targeted to fiat currencies copycatting their mechanisms using stability reserves and smart contracts.
[Launch planned on Q3 2018 — Q2 2019]
Boreal (by aurora-dao)
Stable crypto-assets (Boreals) backed by a combination of ether reserves, debt from loans, and dapp endorsement.
[Launch planned Q3 2018]
Stable tokens pegged to fiat currencies, backed by a diversified, overcollateralized, and auditable crypto-asset reserve.
Tokens stabilized by crypto-assets locked in a smart contract, “fully” decentralized.
On-chain collateral-backed stablecoins (Bridgecoins).
Stablecoins backed by multiple cryptocurrencies and simple reserve mechanisms.
[Beta — Launch TBD]
3) Seigniorage Shares
Acting as a (partially) decentralized bank and incorporating elastic supply mechanisms. Often involve some collateral positions, algorithmic regulations and complex stability mechanisms [Further readings here]:
Cryptocurrency (BAY) aimed to be stabilized via a dynamic peg using “liquid” and “frozen” tokens and decentralized governance mechanisms.
[Live since 2015]
Cryptocurrency (USNBT) stabilized by issuance mechanisms and custodial grants.
[Live since 2014]
SteemDollar (by Steemit)
Tokens (SBD) to be stabilized on the Steem blockchain with a 1:1 USD conversion rate — based on a convertible notes system.
[Live since 2016]
PROJECTS IN DEVELOPMENT
(ex Basecoin): To issue stablecoins via smart contracts acting as a central bank to inflate and deflate prices by issuing bonds.
Cryptocurrency monitored (Carbon) by an elastic supply through market participants, powered by Hedera Hashgraph.
Cryptocurrency whose price is maintained by an automated inflation/deflation control.
[Beta — launch TBD]
Stable (low-volatility) tokens (USD Fragment) with an auditable reserve and monetary supply policy.
Kowala (by Kowala Tech)
Cryptocurrency (kCoin) to be stable against fiats, cryptos and other types of assets maintained with algorithms and market-based oracles.
[Beta — launch TBD]
Stable cryptocurrency (Polys) backed by a basket of assets stabilized by the Topl foundation that issues and redeems tokens.
Tokens (STB) to be stabilized through a flexible supply and demand with inflation containment mechanisms.
Tokens whose price is maintained via multiple stabilization mechanisms involving a DAO, cryptocurrencies reserves applying various monetary systems.
[Launch planned on Q1 2019]
Cryptocurrency pegged to a basket of currencies (e.g. SDR) and assets with its value algorithmically stabilized; involves decentralized elastic supply mechanisms.
For cryptos to go mainstream, we are going to need price stability, because that will give users the confidence in making daily transactions. The full adoption of stable coins could boost mass adoption of cryptos by protecting new entrants from the risks of cryptos while introducing them to the inherent benefits of this new digital asset class.
If stable coins can be implemented properly, in addition to being trustworthy, scalable and secure, they could become the holy grail of cryptocurrencies and one of the foundations of the emerging digital cryptocurrency-based economy.
CaptainAltcoin's writers and guest post authors may or may not have a vested interest in any of the mentioned projects and businesses. None of the content on CaptainAltcoin is investment advice nor is it a replacement for advice from a certified financial planner. The views expressed in this article are those of the author and do not necessarily reflect the official policy or position of CaptainAltcoin.com