What stablecoins are and how do they differ from conventional cryptocurrencies.
Stablecoins are digital cryptocurrency assets that are tied to the value of other assets (mostly the fiat ones), which allows them to maintain exchange rate stability. We often write about them in our news section about stablecoins.
Most people consider cryptocurrencies exclusively as investment tools, and far from the most reliable ones. There are a lot of problems on the way of their use as payment instruments, but the biggest of them is high volatility. The rates of even the most famous cryptocurrencies can fluctuate over a wide range. It means that no one will want to pay for a haircut or a new car with an asset, the rate of which can grow to heaven tomorrow. Saving funds in cryptocurrency is also dangerous - at any moment an asset can significantly lose value and from time to time it happens even with the largest players on the market.
To reduce volatility or even completely eliminate it, stablecoins were created - crypto assets with relatively stable rates, tied to the value of other assets.
To illustrate the structure of stablecoins, we will analyse their main types, depending on the type of asset securing them. Stablecoins can be secured with:
- fiat currencies;
- one or more cryptocurrencies;
To create a stablecoin based on fiat currency, it is enough to put a certain amount in fiat on the bank account and emit the corresponding number of coins. Exchange when buying and selling is done at the rate of one to one. Just like with fiat, you can use any other asset, for example, precious metals.
Stablecoin remains stable only if it secured with fiat coins in full. In addition, the threat of hacker attacks is virtually eliminated due to the lack of blockchain (however, no one has canceled the bank robberies). At the same time, the pricing mechanism is simple and understandable for most potential users.
It is worth noting that fiat stablecoins contradict the decentralisation concept of cryptocurrencies, since reserves are stored in an intermediary bank. In addition, traditional currencies are gradually depreciating, which minimizes the benefits of such stablecoins for long-term investments. In addition, it is highly likely that the issuing state of fiat currency will seek to take control of its stablecoin. The stability of the system directly depends on the bank in which the security of the currency is stored. For the security of the system, you will have to resort to the services of independent auditors who will confirm the amount deposited with the value of the emitted coins.
Cryptocurrency and unsecured stablecoins
The principle of securing with cryptocurrencies is similar to the previous one, with one significant difference - for each “stable” unit, a larger amount of crypto is taken, for example, in one to two ratio. There is no centralised storage, all transactions take place on the blockchain.
This (to some extent) protects investors from fluctuations in the exchange rate of the providing currency. However, if it falls below a certain value, stablecoin will cease to exist.
Unsecured coins use the principle of seigniorage. The rate of an asset is taken as the basis and if the coin price is higher, more coins are emitted, and if lower, a certain amount is bought out by the issuer to maintain equilibrium. If this also does not help, the emitter shares his profit from emitting new coins with their customers. All processes take place exclusively in a digital environment, which provides greater transparency of the system compared to the two previous methods.
The main disadvantage of this approach is the instability of such stablecoins: the exchange rate will remain at the same level only in case of stable high demand.
The market is dominated by stablecoins tied to the most popular fiat currency in the world - the US dollar. Periodically, new stablecoins from famous players appear. For example, Binance recently announced the release of a new stablecoin. This is not surprising, because at any moment they can be bought and sold liquidly. Nevertheless, there are other promising projects that are worth paying attention to.
In 2015, the digital equivalent of the US dollar was released. The regulator quickly became interested in the asset and during the checks it became clear that the administration understands the "security" of cryptocurrency with fiat currency in its own way. As it turned out, in addition to cash reserves, Tether is also secured by loans from its subsidiaries. Concerns about that were expressed by influential print media, in particular the Wall Street Journal, and some experts say that Tether is dangerous for the cryptocurrency market. Although it turned out to be difficult to determine the exact amount of cash, the monetary unit exists to this day and enjoys stable popularity. And recently, Teather announced the release of a new stablecoin tied to the yuan.
DGX is a coin on the Ethereum blockchain, backed by real gold reserves. Crowdsale was held in 2016 and lasted only 12 hours instead of the planned month. The bars are located in a special Singapore repository, which can hold approximately 30 tons of gold. The company plans to open other storage facilities around the world, and an independent audit company is engaged in stock verification. Many consider the project promising, others say that Digix is a long-term pyramid that can burst at any moment. Only time will tell whether it’s true or not, and today, everyone decides for himself whether to trust their money to the administration of the resource or not.
DAI is a stablecoin on the Ethereum blockchain pegged to the US dollar. You can see more information about it in the news section about MakerDao, and a more detailed description here. All operations go through the blockchain, which provides the project with proper transparency. Coins can be bought and sold for Ethereum, and if sold, they are destroyed. Smart contracts guarantee the impossibility of creating unsecured DAIs. The second (utilitarian) MKR token is used to repay exchange commissions. The coin is quite popular and seems to really keep its rate at a fairly stable level.
The first major project of an unsecured stablecoin, the issue of which would depend on the emission and redemption of securities. The project secured the support of large investors and received $113 million from them, but failed to enter a coin in the legal field. The investment was payed back and Basis closed at the end of 2018.
TUSD - stablecoin with standard ERC20, depending from the US dollar. Unlike Tether, its administration regularly conducts transparent audits, the results of which can be read by anyone. The team plans to create digital analogues of other well-known fiat currencies.
USD Coin (USDC)
The undoubted plus of this stablecoin is that it is 100% backed by dollars and is already available at large exchangers. The project is owned by the well-known Circle company in collaboration with Coinbase, the well-known cryptocurrency exchange. The team plans to achieve decentralization by inviting third parties that can independently issue USDC. The presence of serious partners, such as Bitmain and Goldman Sachs, causes a certain confidence in the project.
Paxos Standard Token (PAX)
Stablecoin on the Ethereum blockchain, which is managed by the New York Department of Financial Services. The smart contract managing the platform has already been verified by independent auditors. Regular inspections of reserves held by large US banks are planned by third-party companies that are trustworthy. The coin is fully secured by the US dollar.