Why #stablecoins are the latest hottest trend in the #cryptocurrency space, one that has been increasingly called the Holy Grail of crypto, and a solution to bridge the gap between crypto and the mainstream?
One common critique regarding on why the average Joe has been deterred of buying Bitcoin or other cryptocurrencies, is the high volatility of the market. A useful currency should be a medium of exchange, a unit of account, and a store of value. Cryptocurrencies in general are excellent as a medium of exchange, but they fail as a unit of account or a store of value.
This is where stablecoins come in. Stablecoins are price-stable cryptocurrencies, with a market price that is pegged to the value of an underlying asset. These assets can be fiat currencies like the U.S. dollar, the Euro, or the Mexican peso or commodities such as gold, silver, and oil. They are called stablecoins because the value of these cryptocurrencies is kept stable in relation to the underlying asset.
The Holy Grail of Crypto
Stablecoins leverage all the advantages of cryptocurrencies. They are cryptographically secured, easily, and fast transferable between parties, and anyone with an internet connection, can access them, unlike what is prevalent in the traditional financial systems. However, stablecoins are not subject to the extreme price volatility that regular cryptocurrencies are affected by. In this sense, stablecoints introduces to their users all the benefits of cryptocurrencies and blockchain technology, but protects them from the risks associated with price volatility. This makes stable coins ideal as a medium of exchange, a unit of account, and a trustworthy store of value.
Why stablecoins are one of the biggest opportunities for mass-adoption? Because by allowing for an entry into the crypto space without exposure to the market’s high volatility, its total addressable market (TAM) becomes potentially, all the money in the world, which is estimated to be around $90.4 trillion. In this sense, stablecoins could be the next step towards a global, fiat-free, digital cash world, a vision larger than that of Bitcoin itself. This is why stablecoins has been commonly called the Holy Grail of cryptocurrencies.
Benefits of Stablecoins
Stablecoints benefits are particularly well-demonstrated in the remittance market. Remittances are cross border transfers of money from workers in one country back to their country of origin. Each year, billions of dollars are sent by migrant workers to their families, with some estimates putting the total value of remittances at more than $570 billion.
However, a large proportion of the remittances is drained away by the transaction costs of sending money internationally. Given the typically low incomes of migrants and the small amount of each remittance transfer, too much is being spent on these transactions – and too little of the money is reaching migrants' families.
#BlockchainTechnology offers a way to make this industry far more efficient and transparent. However, due to the typical price volatility of cryptocurrencies, they aren’t the ideal solution yet. Consider a migrant worker that sends coins like Bitcoin or Ether to his or her family back home, and there is a sudden 20% drop. This means that 20% of the whole value of the remittance has gone away.
Stablecoins solve this issue by allowing anyone to open up a wallet and enabling near instant transactions, but with the absence of price volatility. By protecting migrants from the risks associated with price volatility, they can now benefit from all the advantages of cryptocurrencies such as being easy to send internationally, being easier to safeguard than physical cash, and that is not controlled by any government.
An overview of Stablecoins:
USD Tether (USDT) is currently the best example of a stablecoin in the market. USDT achieves stability simply by pegging the value of each token to 1 US Dollar. While a fiat-backed cryptocurrency is a simple and effective approach to protecting its holders from the market’s volatility, its price-robustness comes with a price: centralization.
Reportedly, for every USDT in existence Tether holds a US Dollar counterpart in the company’s bank account. Whether this is actually true remains the question, with many pointing to a lack of transparency, proof of financial standing, and no legal obligation to convert USDT into USD according to their terms of service.
Having learned from Tether’s issues, Truecoin’s TrueUSD is 100% collateralized in USD escrow accounts. This means every person who holds TrueUSD tokens, is a beneficiary owner of the escrow account in which the funds are held, protecting token holders with enforceable legal rights. In order to protect token holders, users have to complete a Know Your Customer and Anti-Money Laundering (KYC/AML) process before purchasing or redeeming TrueUSD tokens for the US Dollars in the escrow account.
Moreover, the auditing of TrueUSD is transparently done. The company provides certificates of ownership through trusts, proving that the underlying USD is really in their bank accounts. And to ensure a 1:1 parity between the TrueUSD tokens in circulation and the U.S. dollars in the escrow accounts, Truecoin use publicly audited smart contracts that mint TrueUSD when U.S. dollars clear the escrow accounts and burns TrueUSD when U.S. dollars are redeemed. TrueUSD by the teams lemma of building a stablecoin that they would use and trust themselves, is particularly welcomed given the rising tensions and suspicions surrounding USDT.
Another cryptocurrency that is pegged to the value of the USD on a 1:1 ratio is Dai. The Dai stablecoin is an ERC20 token developed by the company Maker, a decentralized autonomous organization. Unlike fiat backed stable coins, Dai is backed by ETH and its value is kept stable in relation to the U.S. dollar using an autonomous system of smart contracts.
Users do not purchase Dai, but instead create it in exchange for Ether; locking up their ETH within the system. Upon returning their Dai, the collateralized debt position (CDP) smart contract returns the same quantity of ETH as originally put up as collateral.
To protect from the volatility of Ether, Dai has an automated process of liquidation in the event of a downwards ETH price movement. This is complex and requires further reading to understand, but in essence, Dai use game theory mechanisms that carefully balances economic incentives in pursuit of having a token that is continuously approaching the value of $1 USD.
A proof that the system works is the recent drop in the ETH value from $1,400 USD in January 2018 to $400 in April 2018 where Dai system´s incentive structure successfully kept the value of Dai pegged to $1 USD.
The dependence on external assets such as fiat or cryptocurrency places a reliance on a third, potentially centralized party. Unlike the majority of stablecoins, Havven designed an autonomous approach to solve volatility. The dynamics of the Havven ecosystem make it one of the very first truly decentralized stablecoins.
Havven’s structure provides stability by building a dual-token economy, where each Nomin token, the stablecoin, is backed by the system’s collateral token, Havven. In return for staking Havvens and maintaining the system that backs itself, collateral holders are compensated with a fee for each transaction completed with Nomis. To eliminate the volatility during large-scale sell-offs, Havven holds 80% of the collateral tokens in escrow.
Basecoin´s creative solution to stability has drawn wide acclaim, with a team of prominent investors from Silicon Valley backing the project. Basecoin´s Basis is designed to expand and contract supply similarly to the way central banks buy and sell fiscal debt to stabilize purchasing power. Both of these processes maintain an equilibrium in the value of Basis.
To work as an algorithmic central bank, the project will utilize two additional currencies: Base Bonds, and Base Shares. When demand is rising, the blockchain will create more Basis. These Basis are given by protocol-determined priority to holders of bond tokens and Base Shares. The expanded supply is designed to bring the Basis price back down.
When demand is falling, the blockchain will take Basis out of circulation by selling bond tokens, creating an economic incentive for Basis holders to sell their tokens for bonds and gaining an interest on their investment. The contracted supply is designed to restore Basis price.
Another project that works on an algorithmic central bank mechanism to automatically contract or expand the supply of tokens is USDX. USDX creates a decentralized monetary policy system by anchoring certain asset prices and enabling a self-balancing mechanism to ensure the Stablecoin’s stability against anchoring assets. There are two phases of USDX’s development.
The first phase is called the Genesis Phase, in which USDX, a token based on Ethereum ERC20, is produced. This token will represent the holder’s concessions in the USDX ecosystem and will not have the self-balancing mechanism of a
Stablecoin.
A Stablecoin anchored to and asset such as the US dollar, called USDY, will be launched on the second phase or stable phase, and will run on a public chain. On pegging day, the USDX holders will be able to get an equal amount of the newly issued Stablecoin, while maintaining the possession of their USDX tokens.
To achieve stability, the USDX Protocol will developed a threefold mechanism, that is able to adjust the elastic supply of Stablecoin’s circulation, in order to preserve constant, the USDY/USD parity. By implementing a variable block reward, mining locking and a variable transaction fee, USDX can increase or decrease the total quantity of money in circulation or its velocity accordingly.
Even though the Singapore-based project is still in its beginning, it promises a third-generation stable coin differentiating itself in terms of superior decentralization and robust algorithmic logics derived from economic principles to achieve stability without the need for a collateral.
Challenges of Stablecoins
According to Sherman Lee from #Forbes, an optimal cryptocurrency should have the following four traits: price stability, scalability, privacy, and decentralization. None of the current stablecoins have all these four features together, being scalability and privacy the two biggest challenges out there. If stablecoins are the holy grail of crypto acting as global digital cash, they must be fast, cheap, and private. Scalability is needed in order to be global. Privacy is needed for businesses, governments, and financial institutions to protect their business interests and relationships. A completely transparent ledger is not usable for these purposes. Even though addresses could be cryptographically secure, simple chain analysis could link them with known entities with a fair degree of certainty, deterring big organizations to join the network, and thus, preventing real mass-adoption.
Conclusions
A successful implementation of stablecoins could be a major catalyst for fundamental long-term changes in the global economy. Lack of price stability prevents cryptocurrencies from displacing most forms of fiat money, and stablecoins can provide the solution. By allowing for an entry into the crypto space without exposure to the market’s high volatility, stablecoins promises to further improve adoption among the masses.
If stablecoins can be implemented properly, in addition to being trustworthy, scalable and secure, they could be the next step towards a global, fiat-free, digital cash world. The so called “Holy Grail of crypto” let us dream that a world where cryptocurrencies are used to buy coffee every day, is close.
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