Stablecoins are a noble dream of combining the best properties of cryptocurrencies with the stability of (some) fiat currencies. As you know, an asset is considered money in the fullest sense of the word, if it is:
- medium of exchange;
- a store of value;
- unit of account;
- fungible, divisible and moveable.
It is easy to see that not even all fiat currencies meet these requirements: it is difficult to consider as an meaningful means of savings, for example, the mark of the Weimar Republic with its hyperinflation in 1919-1923, also the modern Venezuelan bolivar also does not comply with the above rules for a similar reason.
At the same time, not all cryptocurrencies, in turn, can be considered a convenient mediums of exchange because of existing problems with scalability: Bitcoin can barely manage three or four transactions per second, Ethereum – 15-20 transactions per second. However, the best minds of the cryptocurrency world are working on this problem, and we always have XRP in stock, capable, as the developers say, to make up to 50000 transactions per second, which allows it to compete with the giant of the payment business – VISA.
Most digital coins have another problem – high volatility. You must admit it is not very comfortable when, for example, while you go around the supermarket, choose goods, come up with them at the checkout and pay, the purchasing power of your crypto-money changes literally before your eyes. For the same reason, many are afraid to use cryptocurrencies as a store of value: what may seem like a promising asset today, no one will remember in a year. As Ripple co-founder Chris Larsen noted:
“Ninety percent of what we see today [in digital assets] won’t exist in ten years time, but the other ten percent of it will change the world.”
On this optimistic note we return to the stablecoins.
Stablecoin is the “holy grail” of cryptocurrencies, which should be the ideal money for all parameters. But how to translate this idea into reality? Stablecoin can be secured with some relatively stable asset (usually a certain fiat currency, much less often real estate, gold, etc.) or have a value by itself, which in practice is expressed in three main methods of implementing a stable coin:
- Link the cost of the stablecoin directly to a fairly stable fiat currency, for example, to the US dollar, the Japanese yen, and so on;
- Link the cost of the stablecoin indirectly to one or more cryptocurrencies and artificially regulate the exchange rate in relation to them;
- Introduce a certain algorithm (for example, using smart contracts), which automatically changes the supply of coins depending on demand, leveling the rate.
We will look at all three methods and analyze what they can boast. The list does not claim to be exhaustive; nevertheless, it gives some insight into why 2018 is the year of stablecoins and why investors increase an interest to these assets.
We begin, of course, with the most popular Tether (USDT), which is pegged to the US dollar in a 1:1 ratio, and occupies the 8th place among all cryptocurrencies by market capitalization (more than 1,85 billion dollars at the time of writing). Over the past year and a half, Tether managed to go down (down to $0,91), and up (up to $1,11), according to the CoinMarketCap volatility chart. The reasons for distrust to Tether were exhaustively explained by Michael Novogratz.
TrueUSD (TUSD): 29th place in the CoinMarketCap ranking by capitalization (about 194 million dollars); not counting a few bursts of value (May 16, 2018, the rate rose to $1,31, and on May 22, the value was at $1,21), this stablecoin was more or less stable, the price did not fall below $0,97.
USD Coin (USDC): 33rd place in terms of capitalization ($174 million), since October 2018, it has been holding in the framework of $0,98 – $1,08.
Paxos Standard Token (PAX): 40th in terms of capitalization ($138 million), in two months of its existence it managed to climb to $1,07 and fall to $0,97, but for now it is doing well.
Dai (DAI): 69th place in terms of capitalization ($60 million), at the dawn of its existence in the winter of 2018, he saw both $0,89 and $1,07, but overall he confidently ranged from $0,95 to $1,04.
Gemini Dollar (GUSD): 103th place by capitalization ($35,6 million), since October 2018, despite several fluctuations (October 16 – $1,16, November 14 – $1,18) is in the region of $0,97 – $1,04.
Steem Dollars (SBD): 234th place in terms of capitalization ($10,8 million), saw a lot in his life, from $0,75 to $22,34, from November 2017 to June 2018 he went free-floating to $14, then returned to an adequate range, but now costs $0,83, probably due to the recent meltdown of the cryptocurrency market. Does stability look a little different, or is it just me?
CK USD (CKUSD): occupies 1737th place in the CoinMarketCap rating, although the capitalization is unknown. The only thing that was found out – the daily trading volume fluctuates around $150–200 million, but who created this stablecoin, how and why is a mystery. Volatility is relatively low: the exchange rate does not exceed $0,92 – $1,03. This mysterious digital beast is found on the BCEX and Allcoin crypto exchanges.
PricewaterhouseCoopers, an audit company, together with the decentralized credit platform Cred, also creates their own dollar stablecoin. CarbonUSD is preparing for a full-scale launch and in addition to the Ethereum blockchain, it will be released on the EOS blockchain.
Many companies are working on the creation of stablecoins, tying their value to other currencies. For example, coins of GMO Internet, Inc. and Grandshores Technology – to the Japanese yen, SwissRealCoin – to the Swiss franc (although it will be backed not with fiat, but with real estate), LBXPeg from the London Block Exchange – to the British pound sterling, Novatti AUD Utility Token – to the Australian dollar.
In addition to creating new stablecoins, there are “hybrid” solutions, for example, HUSD from Huobi combines four dollar stablecoins: Paxos Standard (PAX), True USD (TUSD), USD Coin (USDC) and Gemini Dollars (GUSD).
Binance decided to go in a simpler way and simply collected all the stablecoins in the united USDⓈ market.
However, for some representatives of the market, everything turned out to be not so rosy – some stablecoins suffered a crushing defeat, for example, NuBits (USNBT) had sunk into oblivion.
It is worth mentioning the existence of numerous “golden” stablecoins, like Digix Gold Token (DGX): 482th place by capitalization ($3,2 million), 1 DGX = 1 gram of gold. Until the end of the year, according to the developers, the reduced rate of the token will be artificially maintained in order to “increase the accessibility of physical gold ownership to the masses.” In general, such steablecoins are not particularly popular. In the case of Aurum Coin (AU), this led to a “51% attack.”
Maker (MKR): 40th place in the ranking ($135 million); backed by ETH according to the developers, works through the magic of smart contracts and must be equal to 1 US dollar. We would also like to believe in magic, but just leave this chart here:
bitUSD (BITUSD) ranks 322th in terms of capitalization ($7,3 million). At the beginning of 2016, it managed to fall down to $0,76 and soar up to $2,21, but after these fluctuations, it keeps within $0,8 – $1,2. Secured with BitShares’ own cryptocurrency (41th in the ranking, capitalization – $135 million). The platform is provided with another pair of stablecoins, bitCNY (BITCNY) and bitGold (BITGOLD), tied to the yuan and gold, respectively.
Havven nUSD (NUSD): 682th place in the rating (over $ 1,5 million), short-term fluctuations reached $0,87 – $1,08, natural habitat – range $0,95 – $1,01. Unfortunately, the second stablecoin from the same developers – eUSD (EUSD) – has already died.
At the moment, apparently, there is not a single functioning algorithmic stablecoin, but this is not for long – many startups are working on a variety of projects in this direction.
Haven is an Australian project that is working on a set of stablecoins (Haven Dollar XUSD, Haven Euro XEUR, Haven Swiss Franc XCHF, Haven Gold XGOLD), the listing of which will not happen until 2019. These stablecoins are not backed, stability is achieved by using algorithms.
A specific concept is proposed to be implemented in the Fragments project: if the supply of coins grows by 10% – your assets from 1000 μFragments turn into 1100 and vice versa – if the supply falls – 1000 coins turn into 900.
What is Wrong With the Stablecoins?
Let’s turn to the research of the Blockchain company and see how the landscape of the stablecoins looks from a bird’s eye view. Of the 57 stablecoins considered:
- 45% are already running, the majority – in the last year;
- 55% exist only in the form of projects;
- 77% are tied to some other asset;
- 66% are tied to the US dollar;
- 98% of the stablecoin trading is accounted for by Tether;
- 3 billion dollars – this is the market value of all stablecoins (1.5% of the total cryptocurrency market), about 350 million directed to their creation.
So where is the catch? First, centralization. The ecosystem of a stablecoin backed with a certain amount of another asset (¾ of stablecoins) must have a central organization that accumulates this asset. The fate of many investors in the end depends critically on the success and honesty of one organization, which has implications. For example, the US Justice Department, along with the Commodity Futures Trading Commission (CFTC), has already launched an investigation into Tether Ltd. and its associated Bitfinex exchange. Coins of another centralized ecosystem, Gemini USD, can be frozen at any time, and transactions can be suspended, blocked or completely rolled back.
However, not all stablecoins have such a problem: cryptocurrency-backed and algorithmic ones can be decentralized, albeit more complex. However, another, non-trivial form of “centralization” of crypto-backed stablecoins is possible when such a coin is associated with only one cryptocurrency – if they die for some reason, they will do it in one day. The probability of this, if the initial cryptocurrency is sufficiently decentralized, of course, is extremely small.
Secondly: in the long-term, too close link between fiat stablecoin and the “original” fiat theoretically limits the spread of the coin: when some part of fiat is removed from circulation and replaced with stablecoin in a 1:1 ratio, it would seem that nothing has changed. But if an ordinary fiat is welcomed everywhere, everything is not so smooth with cryptocurrencies and, ultimately, the fiat offer drops slightly, the velocity of money increases, thus reducing the value of the stablecoin, respectively. But since the fiat, which was exchanged for a stablecoin, does not disappear, will we end up with a potential inflation bomb? Anyway, only serious and deep economic research can provide an accurate picture of the long-term mutual influence of fiat and the corresponding stablecoins.
What are the Benefits of stablecoins?
With all their flaws, crypto industry is impossible without the stablecoins.
Firstly, even moderately stable coins for residents of countries suffering from hyperinflation are a lifeline.
Secondly, stablecoins is a way to hedge against the volatility of Bitcoin and other cryptocurrencies. For many traders, it is much more comfortable to wait out the decline in exchange rates by transferring their assets to stablecoins, while remaining ready to respond to new movements in rates. To transfer assets back to fiat, to deal with banks, then spend hours or even days returning your money to the crypto market — to put it mildly, inconvenient.
So, paraphrasing Chris Larsen, we can say: ninety percent of what we see today in stablecoins won’t exist in ten years time, but the other ten percent of it will change the world.