Stablecoins (as the name suggests) are digital assets designed to maintain a consistent price. They are a store of value like the money you’d traditionally keep in a savings account and not a speculative investment. They are stable in nature which typically comes from the backing of some alternative value (often pegged to a fiat currency like the US dollar or collateralized against commodities like gold). In most cases they are being backed by a reserve of USD because this is the world reserve currency that is most widely used in trading markets.
In other words, a stablecoin uses a fiat currency like the US dollar, the Euro or the Yen, which backs each cryptocoin in circulation. It’s a currency that is global, but is not tied to a central bank and has low volatility. Being tied to the dollar or gold for instance, doesn’t automatically mean there’s zero volatility and its value will fluctuate as much as the value of its collateral asset, so if gold goes up in value, so will the coin and the same goes for USD, but the value of USD is with a low market volatility in general, hence the name “stable”.
One of the main factors driving merchants away from accepting Bitcoin is the price volatility. Often there are days with more than 7%-10% price drop or increase in market value which is the main reason why several major players have dropped Bitcoin as an accepted method of payment. What is lacking in today’s Bitcoin transaction is the belief that a Bitcoin is going to be worth the same as it is today, tomorrow or next week. In the time that it takes for this transaction to take place, it’s also highly likely that the price of the crypto asset will change. If it depreciates, the buyer will be at a disadvantage, if it appreciates then the seller loses out. Hereby, stablecoins are seemingly the solution to much of these problems.
One of the most prominent examples of a stablecoin is Tether (USDT) which was launched as RealCoin in July 2014 and was rebranded as Tether in November by Tether Limited, the company that is responsible for maintaining the reserve amounts of fiat currency. It started trading in February 2015 (first on Bitfinex) and quickly grew in popularity when it was added on Bittrex, Poloniex and Binance (to name but a few) as the main alternative to the US dollar. Since then there has been a lot of controversy surrounding the ever-growing amount of coins printed and the lack of proof of its backing. In January 2018 it hit another hurdle as the necessary audit to ensure that the real world reserve is maintained never took place. Instead, Tether announced it was parting ways with the audit firm. The future of this coin remains unstable and it’s one of the main reasons why in 2018 alone, we are witnessing an explosion of new “stable” coins from every major crypto player including the recently announced Gemini Dollar (by the Winklevoss brothers) and USDC (by Circle owned exchange – Poloniex).
The ‘Gemini Dollar’ (GUSD) also claims to be pegged 1-to-1 with the US dollar, however, what sets it apart from Tether and other stable coins is their emphasis on transparency and regulatory compliance. Gemini work with a trusted financial services giant, State Street. The Boston-based corporation will hold the dollar reserves in an FDIC-insured account, with San Francisco-based audit firm BPM conducting an audit every month to ensure that every Gemini Dollar is backed by a dollar in reserve.
A stablecoin issued by Circle and Coinbase is available to the 25 million Coinbase clients, both on its retail platform as well as its Coinbase Pro platform. Coinbase users can convert their fiat currencies to USDC and redeem their USDC to fiat currencies seamlessly.
Last month we heard of another such project – “The White Company” (a luxury goods business) launched its own WSD stablecoin. is independently audited monthly and backed completely by fiat deposits. The Stellar network was chosen as the protocol to host WSD to ensure speed and scalability for its users.
Adopted by Bittrex and Binance already, this is a USD-backed ERC20 stablecoin that is fully collateralized, legally protected, and transparently verified by third-party attestations. TrueUSD uses multiple escrow accounts to reduce counterparty risk and to provide token-holders with legal protections against misappropriation. It is also the first asset token built on the TrustToken platform-which is a platform to create asset-backed tokens that you can easily buy and sell around the world. For example, gold to gold tokens or dollar to dollar tokens can be made via the TrustToken platform.
To redeem USD, one needs to pass a KYC/AML check and then send the smart contract, your TrueUSD tokens, from a registered Ethereum address after which the escrow bank will send you funds in USD. This way, the TrueUSD system does not touch the funds, and the trust companies do all purchase and receipt of user’s money through escrow accounts.
Issued by Blockchain Trust company Paxos, it gained traction fairly quickly and six of the top ten crypto exchanges have already listed the asset, including Binance and OKEx.
Maker is a decentralized autonomous organization that is pegged against the U.S. dollar, but is completely backed by ETH. Their stable coin is Dai and each one is worth $1 USD. Stability is maintained through an autonomous system of smart contracts.
And the list goes on… (CKusd, Eurs, StrongholdUSD, Havven, Basecoin, Terra, Quintric …)
This year we saw a great deal of new “stable coins” coming to life and this trend will continue. The need for a digital alternative to the fiat currencies we use to buy or sell Bitcoin (and other digital assets) is what is driving this trend and there are no signs of it slowing down. While Tether was able to print endless amounts of its digital token, today’s investors and traders are much more inclined to use one with greater transparency and stability. The market demand is for a trustworthy alternative with provable audits in place. This means we will have more than one “stable” coin due to the necessary liquidity of the backing asset (be it USD or gold etc). Gone are the days of a single coin printed in hundreds of millions per week like what we saw from the Tether fiasco.
But Are They Really Stable?
If we take for example a coin that is pegged to the USD – that means for each coin, there is a dollar in a reserve that is audited and provable. In some cases, the collateral is higher and can be up to twice the value of each coin. One example, provided previously by CoinTelegraph, makes this easier to illustrate. If you were to issue $1 USD stable coin, then you would deposit $2 worth of the collateral coin. At the end of the day, you would have a stable coin that is 200% collateralized, creating wiggle room in the (most likely) event the collateral was to drop in value. If we look at this type of coin from a scalability perspective, we could argue that by having fiat currency sitting idle in a bank account, constitutes a significant wastage of capital. Scalability is therefore an issue and with growing popularity it becomes ineffective to keep adding more to the reserve.
In addition to that, we are seeing a lot of these new “stable” coins displaying a volatility on their own. It’s often to do with the trust value and use-cases, for instance, one DAI is supposed to be worth $1.00 but it has been as low as $0.92 and as high as $1.11 just in the last few months. Same happens to TUSD and USTD. These are small fluctuations of course, but a fact nevertheless.
Lastly, for quite some time now we have been hearing about a possible dollar collapse and it is not yet happened. If it does however, so will the value of your holdings in any dollar-pegged coin. When could that happen is unknown but is it possible? Absolutely.
12 thoughts on “Stable Coins – A Quick Guide”
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