Many factors prevent cryptocurrency from being widely adopted and used as currency in the mainstream, something which was desired when they first appeared. There are many reasons for this, including the notorious instability of cryptocurrencies and high fees. It is hard to buy something with a volatile value. We’ll use a simple example of a purchase such as coffee. It is instantaneous and costs the same as it would in Fiat. The fluctuation in Ethereum (ETH), however, could result in a much more expensive purchase.
Stable Coins are the solution for this issue. They are fast becoming the Holy Grail of crypto. Stable Coins promise both a place to store value during volatile market periods, as well as a reliable way to conduct transactions. Stable Coins are a global currency, not linked to any central bank, and have low volatility. This allows them to be used for everyday transactions, such as paying for groceries.
The actual implementation of a coin that is stable can be extremely challenging mathematically. It will take a lifetime to discover.
Stable Coins: Types and Applications
Three main stable coin types exist. There are three main types of stable coins:
- Fiat collateralized
- Crypto collateralized
- Non-collateralized
Fiat Collateralized
These centralized stablecoins are backed by fiat currency and rely on a private actor issuing IOUs that can be redeemed at a 1:1 rate for the underlying assets. The IOUs’ convertibility helps to keep the 1:1 exchange ratio.
Fiat-backed stablecoins, also known as fiat collateralized coins, store their value using fiat currencies, such as US dollars or Euros. These fiat-backed stablecoins not only support relative stability but also take active measures to maintain the peg. For these stablecoins, fiat-collateralization represents a huge opportunity for mass adoption.
This stablecoin is most vulnerable to counterparty risks. Stablecoins are dependent on a central entity such as a banking institution and therefore susceptible to geopolitical destabilization. Mt. Gox can be used to remind us of the weakness in trusting a central counterparty.
The fiat-collateralized model of stablecoins becomes even more dangerous if there’s a lack of trust that the central party can cover the IOUs, which was the case earlier this year with Tether. These issues are easily resolved when assets can be audited and the central entity is able to provide enough data that shows it has sufficient assets to pay outstanding IOUs.
Crypto collateralized
The dollar, Euro, Yuan, etc., can be replaced by other fiat currencies (such as the euro, the yen, or the yuan). Or commodities that are traded on exchanges (gold, silver or other industrial metals, for example). Crypto-collateralized Stablecoins backed by a combination of cryptocurrencies.
Stablecoins are over-collateralized to take into account the volatility of the collateral that backs the stablecoin.
The financial dictionary defines over-collateralized as — the practice of placing an asset on a credit where its value exceeds that of the loan.
Say we receive 100 stablecoins for depositing 200 ETH. Now, the stablecoins have 200% of collateral. The stablecoins will still maintain their value even if Ether’s price drops to 25.
Non-Collateralized
The coins mimic the fiat currency stability system in reserve banks, while maintaining their independence and decentralization. They are not backed by any coins or assets. Seigniorage is used to calculate the shares.
Seigniorage uses smart contracts the same way reserve banks use fiat currency. Smart contracts can be reprogrammed to act as reserves banks. They are then able to control the coin supply to keep the price of the coin at the same level as its pegged asset.
Tokens that are not collateralized work according to the economic principles of supply and demande. Smart contracts can decrease or increase token supply based on coin value at any given time. Smart contracts will buy coins if the price is below the pegged market asset to increase the value and decrease supply. The excess profits in the system are used to do so. If there are no coins to be purchased, the shares that give holders rights to future profits will be issued.
Saga, previously known as Basecoin, and Basis are two examples of coins that use this system. Saga’s fractional reserve is tied to Special Drawing Rights of the International Monetary Fund (SDR). Basis will initially be pegged to the US Dollar and later to the Consumer Price Index.
The most popular stablecoins
Tether
USDT is one of the world’s most popular stablecoins. It achieves its stability by simply tying the value of every token to one US Dollar. Tether reportedly holds US Dollars for each USDT it has in its bank account.
A fiat-backed crypto is an effective and simple way to protect its owners from market volatility. However, given the centralized concept and the reliance of the US Dollar on it, this is not a very sophisticated solution. Tether may claim decentralization but a recent $30 million hack clearly undermines that.
Tether’s USD holdings have been questioned repeatedly, and many point to the lack of transparency, or proof of financial status. And crucially, Tether’s terms of service state that there is no legal requirement to convert USDT to USD. The centralized nature of USDT, its permissioned status, and the link between USDT, fiat currencies, has also been widely criticized by the crypto community.
USDT is still a stable currency, which traders continue to use for arbitrage, free transactions and stability that far exceeds the other cryptocurrencies.
DAI Token
Maker as well as the DAI were two solutions I was told about at the recent Crypto Valley. This event, held in Zug in Switzerland’s Crypto Valley brings together cutting edge corporations and innovative startups using distributed ledger technologies in an event with a multi-industry theme. MakerDAO powers the DAI. MKR is the fee and governance token for the Dai Stablecoin Platform. It is used by Dai generators to pay fees and to vote about Dai’s risk parameters. Dai’s value is pegged to the US dollar by a ratio of 1:1.
The USDT is directly linked to the USD price, which means that for every Tether-the-token on the blockchain, there’s also $1 in a bank account owned by a href=”https://tether.to/”>Tether the organization/a>. 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. You’ve probably heard of Tether issues such as its auditing problems and the actual reserves that back its stable coin. The token is not stable without the actual backing. DAI solves the issue because it is created and backed with collateralized ether. DAI is completely automated by smart contracts on the Ethereum Blockchain.
DAI is a stable coin that is able to maintain its value in relation to USD through a system of price and collateral feeds. It is the ideal way to make everyday transactions. The stable coin is a great way to enter the crypto market without being exposed to its high volatility. You don’t need to worry about overpaying for your coffee.
DAI is a major step for stable coinage. There have even been proposals to tie DAI with multiple fiat currency.
TrueUSD
Truecoin’s TrueUSD is another interesting project I will talk about. This newcomer gives traders the peace of mind they need due to its transparent, legally compliant and ethical approach. TrueUSD’s USD escrow account is managed by multiple banks, and the token holders are legally protected.
TrueUSD sells tokens for fiat. As new tokens enter the market, TrueUSD mints them. The tokens that are redeemed with fiat currency will be burned and removed from circulation. The USD will then be released from the escrow. Trust companies handle all the money depositing and receiving through their custodial account, so users never have to deal with TrueCoin.
Gemini Dollar (GUSD)
Gemini is one of the biggest crypto exchanges in the world. It has just launched the Gemini Dollar, a dollar-backed stablecoin, to help it compete with other companies that are also launching their own versions.
Gemini will verify their US Dollar deposit monthly by an independent third party to maintain and gain the public’s confidence. Gemini is likely to gain momentum in future despite its lower trading volume than Tether. This is due to the well-established brand of Gemini and their user base.
USD Coin (USDC).
USD Coin is another contender that wants to take a piece of stablecoin pie. The CENTRE consortium launched it, along with Circle which is a US-based fintech company that purchased the Poloniex successful exchange.
USDC, an ERC20 Token, is designed to maintain a 1-to-1 dollar peg. It is backed up by USD reserves that are certified by third-party auditors every month.
List of all stablecoins in 2019
ConsenSys lists the projects that are in active development and live. Here is a complete list.
Live Projects
AAA Reserve
The crypto currency ( AAA ) is backed up by gilts, cash and credit investments AAA-rated and it’s stable in comparison to fiat currencies. Concentrate on larger fiat amounts (>$25k).
Digix Gold Tokens
Gold-Stable tokens (DGX). One DGX is equal to one gram of Singaporean vaulted gold.
EURS
STASIS supports the Fiat-collateralized EIP-20 Stable Token backed by EUR with multiple verification streams.
Tether
USD-backed stable tokens (USDT) built on Omni, market-leader.
TrueUSD (by TrustToken Team)
Built on Ethereum, USD-backed stable currency ( TUSD ), focusing on transparency.
PROJECTS UNDER DEVELOPMENT
Globcoin.io
Stablecoins (GLX) are pegged to fiat currency held under custody.
Jibrel
Built on Ethereum, Stablecoins are backed up by many assets.
PHI
Stablecoins IOU (PHI), backed up by collaterals for loans, are maintained using an algorithm.
Saga
Asset-backed cryptocurrency is a stable currency that has a reserve in a bank regulated by the government.
Stably, Inc.
Reserve-backed Stablecoins , (StableUSD),. Supply is adjusted through open market operations.
Stronghold USD
The Federal Deposit Insurance Corporation guarantees the USD token, which is backed up by various fiat currencies on the Stellar Network.
US Coin
Fiat Tokens (USDC), for crypto payment and trading. (Using CENTRE a framework of stablecoins projects involving real world asset reserves. Issued by CENTRE members and audited CENTRE).
X8currency
The stable cryptocurrency is an X8X , backed by fiat currency reserves.
2) IOU “Semi-Decentralized,” Collateral-Backed Stablecoins
Live Projects
Bitshares
Stable cryptocurrency with multiple assets backing its value (including cryptos).
Havven.io
Stablecoins are backed up by fees, collateral pools and issuing mechanisms.
MakerDAO
Stablecoins are issued by a decentralized system (DAI), which is stable in relation to ETH, and backed up with multiple assets. (Currently only ETH but we aim to expand the multi-collateral option). MKR holders maintain the MKR. Assimilable to derivatives instruments.
StatiCoin
Stablecoins backed with ETH, with a matching system that matches speculators who want to purchase tokens and hedgers buying “stablecoins (Staticoin) to create stability.
DEVELOPMENT PROJECTS
Alchemint
Built on NEO and supported by assets such as fiat currencies, Stablecoins is a stablecoin.
Augmint
The digital tokens ( EUR, the stable currency) are aimed at fiat currencies and copy their mechanisms by using smart contracts.
Boreal
The Boreals are stable crypto assets backed up by an ether reserve, debts from loans and endorsements of Dapps.
Celo
Tokens that are stable and pegged to fiat currency, with a reserve of crypto assets which is diversified, auditable, and overcollateralized.
Reserve by Reserve Research Team
Tokens stabilized by crypto assets locked into a smart contract are “fully” uncentralized.
Sweetbridge
On-chain collateral-backed stablecoins (Bridgecoins).
Stablecoins are backed up by multiple crypto currencies and have simple reserve mechanisms.
Beta — launch TBD
Often involve some collateral positions, algorithmic regulations and complex stability mechanisms.They often involve complex stabilization mechanisms, algorithms and some form of collateral.
Live Projects
BitBay Official
The cryptocurrency ( Bay ) was designed to stabilize itself via dynamic pegs using tokens that are “liquid” or “frozen”, and through decentralized governance.
NuBits
The crypto currency is ( ) stabilized by the issuance mechanisms.
SteemDollar
Tokens will be stabilized on the Steem Blockchain with a 1:1 USD rate – based on an convertible notes system.
PROJECTS UNDER DEVELOPMENT
Basis
(ex Basecoin). :To create stablecoins by using smart contracts that act as central banks to increase and decrease prices through the issuance of bonds.
Carbon
Hedera Hashgraph is a crypto currency monitoring system (Carbon), powered by market participants and an elastic supply of cryptocurrency.
Corion
The price of a cryptocurrency is controlled by an inflation/deflation algorithm.
Fragments
Tokens with a low volatility (USD Fragment), backed by a reserve policy and auditable monetary supply.
Kowala (by Kowala Tech)
The stability of cryptocurrency ( , kCoin), against fiats as well as cryptos and assets other than bitcoins is maintained by algorithms and market oracles.
[Beta – launch to be determined]
The Topl Foundation, which issues tokens and stabilizes them with assets stabilised by polys.
Stable
Tokens ( StB ) will be stabilized through flexible demand and supply with inflation-containment mechanisms.
StableUnit
Tokens that are priced by multiple stabilization methods involving DAOs, cryptocurrency reserves and various financial systems.
TerraMoney
A cryptocurrency pegged to an index of currencies, such as the SDR. The value of SDR and other assets is algorithmically stabilized; decentralized elastic supply mechanism.
The conclusion of the article is:
Price stability is essential for cryptos to become mainstream. This will allow users to feel confident in their daily transactions. Stable coins can help boost crypto adoption by providing protection from crypto risks and allowing new users to experience the benefits that cryptos have.
Stable coins, which are trustworthy, scalable, and secure in addition, could be the Holy Grail of cryptocurrency and the basis of an emerging digital currency-based economy.
