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What are stablecoins?
Stablecoins are a new type of cryptocurrency that often have their value pegged to another asset. These coins can be pegged to fiat currencies such as the United States dollar, other cryptocurrencies, precious metals or a combination of the three. Fiat seems to be the most popular option in the marketplace right now, meaning one unit of a stablecoin equals $1. Stablecoins are designed to tackle the inherent volatility seen in cryptocurrency prices. They are normally collateralized, meaning that the total number of stablecoins in circulation is backed by assets held in reserve. Put simply, if there are 500,000 USD-pegged coins in circulation, there should be at least $500,000 sitting in a bank. With bitcoin suffering abrupt crashes and sudden gains, advocates believe stablecoins help eliminate doubt about conversion rates — making cryptocurrencies more practical for buying goods and services. Examples of the best-known stablecoins include tether (USDT), trueUSD (TUSD), gemini dollar (GUSD), and USD coin by Circle and Coinbase (USDC). Demand for such coins has been growing. In December, Cointelegraph reported claims that four major stablecoins had clocked up $5 billion in on-chain transactions within just three months — enjoying a 1,032% surge in November compared with two months earlier.
Why have they become so popular?
Because they eliminate uncertainty for consumers — especially around conversions. They offer the type of predictability that many countries struggle to achieve with their national currencies — hence why Venezuela, battling hyperinflation and political instability, decided to launch its own cryptocurrency. Stablecoins give owners a safe place to store their assets whenever there are choppy waters in the crypto world. Consumers can quickly and easily convert from unpegged cryptocurrencies to stablecoins when they are worried about where the markets are heading next, eliminating the need to return to a fiat currency. These conversions can also be less expensive than when switching between crypto and fiat, as it takes the transaction fees of payment processing providers and banks out of the equation. At the start of April, tether achieved an all-time high of daily transactions — and according to CoinMarketCap, the stablecoin is even nipping at the heels of bitcoin, with reported trading volumes of $9.4 billion compared to BTC’s $10.2 billion. Part of the stablecoin’s burgeoning popularity may also be down to how crypto exchanges, the main point of access for many consumers, are starting to get in on the action — raising awareness. It was recently announced that OKEx, the sixth-largest exchange, was planning to launch its own Stablecoin. And Binance, the world’s largest exchange, has been aggressively expanding the trading pairs it offers. In November, it rebranded its Tether (USDT) Market to the Stablecoin Market — and subsequently announced it would list a broader range of stablecoins. Explaining its rationale in a January blog post, Binance said: “In the last few months, the stablecoin space has evolved very quickly.”
Who else is issuing stablecoins?
Everyone — from banks to social networks — is getting in on the action.
Even though JPMorgan Chase’s CEO appeared to call bitcoin a “fraud,” the U.S. bank recently unveiled plans to launch a stablecoin to speed up settlement times when transactions are taking place internationally. Although some crypto commentators regarded the financial giant’s step as a ringing endorsement of stablecoins’ potential, others — such as the CEO of Ripple — attacked the “JPM Coin” for a lack of interoperability, which means that other banks would be unlikely to embrace the technology. Anthony Pompliano, the founder of Morgan Creek Digital Capital, went one step further — using his podcast to warn that “we should do everything in our power to prevent” JPMorgan Chase from succeeding, as it would mean trusting a Wall Street bank “that was previously charged with a felony.”
Elsewhere, IBM has launched its blockchain-powered World Wire in collaboration with Stellar (issuer of XLM) — also with the goal of building a cross-border payments network. Here, international banks can create their own stablecoins backed by their local fiat currency — and institutions from Brazil, South Korea and the Philippines have reportedly registered their interest so far. We couldn’t wrap up without mentioning Facebook, which has reportedly hired dozens of engineers to develop a fiat-pegged stablecoin that users could rely on for paying their friends and family around the world. This could help the social network send shockwaves through the remittance industry by enabling foreign workers to transfer money with lower fees. The “Facebook Coin” could be a blessing for the embattled company as it tries to shake off privacy scandals and find sources of revenue beyond advertising. According to CNBC, one analyst believes the stablecoin could deliver an additional $19 billion in revenue by 2021, if the plans are pulled off.
Stablecoins and Exchange Tokens
Stablecoins are designed to bring an element of security to cryptocurrency. They can be backed with fiat currencies, commodities, or other crypto tokens. The name itself says it all. here other assets like bitcoin, ether, and monero experience significant volatility, these assets remain relatively stable as they are pegged to less tempestuous currencies or commodities. Coinbase’s USDC (U.S. Dollar Coin) is a model example. According to Coinbase:
Our mission is to build an open financial system for the world. As part of this mission, we want everyone to enjoy the stability of the world’s fiat currency, the US dollar. USD Coin allows unbanked and under-banked individuals in any country to hold a US dollar–backed asset with nothing more than a mobile phone.
Exchange tokens, on the other hand, are assets created by exchanges which afford their holders some exclusive in-house benefits. In the case of Binance’s BNB Coin, whose ICO helped to finance the creation of the Binance exchange itself, users get discounts when they use BNB to pay fees and can trade the token for other assets on the exchange. There are also buy back programs set up to occur periodically at which times holders can sell the coins back to Binance. Supply will be limited to 100 million BNB after buybacks and burning are complete.
So What’s the Difference?
Like corporate bonds, both stablecoins and exchange coins have a value dependent on the success of some external entity or asset. For example, should Binance run into major trouble, and become insolvent, the value of BNB will suffer right along with the company. Should the U.S. dollar plunge farther and farther into inflated devaluation, a USDC peg to the currency won’t provide as much security. For those paying attention to the global economy, these scenarios are not difficult to imagine. With non-pegged, non-exchange assets like bitcoin, there is volatility. However, this volatility is more loosely correlated with external deterministic factor than these others. In this sense, a free market setting is ideal for something like bitcoin, as liquidity and supply and demand factors find their balance in such an environment not via mandate, but through organic transaction. In an open market setting, tying an emergent asset to a pre-established asset might be foolish, as it could weigh down the potential for the new asset to develop, grow, and unfold as a useful, sound currency. Under the current monopolistic paradigm, however, where force is leveraged to ensure fiat such as the USD is used exclusively as a world reserve currency, stablecoins and pegged assets remain secure, resting on that very same artificial monopoly. In a nutshell, most stablecoins, exchange tokens and corporate bonds are tied to the devaluation trajectory of the world reserve currency, the U.S. dollar. Further, although stablecoins like USDT are said to be backed by fiat reserves, there has been serious controversy calling these claims into question. Tether was put in the hot seat after the website was discovered silently replacing “Every tether is always backed 1-to-1 by traditional currency held in our reserves … 1 USDT is always equivalent to 1 USD,” with the claim that the reserves now consist of “traditional currency and cash equivalents and … other assets and receivables from loans made by Tether to third parties.” When asked last week about this, co-founder William Quigley told Bloomberg:
Whether or not Tether was backed by a dollar or not, actually wouldn’t matter if everybody agreed to take Tether and to value it at a dollar themselves.
Tether is 100% backed by fiat currency assets in a reserve account. The conversion rate is 1 tether USDT equals $1 USD. The Tether Platform is considered to be fully backed if all tethers in circulation is less than or equal to all fiat that is held in the bank account.
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. To receive Dai, you send your tokens to the Maker platform to lock those tokens up.
Havven’s structure provides stability by building a system that backs itself with two coins. The first coin is called Nomins which is the stable coin. This what you would use for everyday transactions. The tokens sitting in reserve are called Havvens. A fee for each transaction completed with Nomins will go back to the company. The fees are then distributed back to the Havven token holders who are rewarded for maintaining the system that backs itself.
Basecoin also pegs their price to $1 USD. However, their approaches uses consensus to contract and expand supply of their coin. When coins are trading for less than $1, coins are contracted by allowing coin holders to buy bonds. Coins used to buy bonds are destroyed. Supply decreases and price increases. They do the opposite to expand supply.
How Many Stablecoins Are There?137 Stablecoins With Collateral Off-Chain
63 Stablecoin Projects With Fiat-Collateral (32 are live):
47 Stablecoin Projects With Gold-Collateral (9 are live):
Dead Stablecoin Projects (total 23):
12 Stablecoin Projects With Other Commodities As Collateral (3 are live):
5 Stablecoin Projects With Combined Collateral (1 is live):
4 Stablecoin Projects With Unknown Details Of Their Collateral (1 is live):
33 Stablecoins With Collateral On-Chain
26 Stablecoins With Algorithmic Models
26 Algorithmic Stablecoins (2 are not dead yet):
What is pegging?
Pegging is commonly associated with the world of foreign exchange, where the currency of one country is fixed or “pegged” to that of a country with a more stable economy. The main goal of currency pegs is to bring stability to more volatile economies, but it’s also a beneficial mechanism for trading partners to make exports more competitive while keeping import costs down.
Different types of pegging.
There are different types of pegging mechanisms and not all pegs are a 100% fixed.
A crawling peg is a fixed exchange rate but one that is allowed to fluctuate between the par value of the pegged currency and a range of predetermined rates. The par value may be periodically adjusted to account for inflation and other market conditions to increase stability. This allows an exchange rate to adjust over a period of time instead of a sudden currency devaluation.
An adjustable peg is also a fixed exchange rate, but one that that has a predetermined level of flexibility built into it (normally between one and two percent). If the rate moves beyond this range, the central bank will intervene to bring the rate back to the target peg. The goal is to allow a country to stay competitive in the export market.
With a basket peg, a currency will be pegged to more than one currency in a weighted mechanism, comprising currencies of its most important trading partners. The reason a country might use a basket peg is the same reason an investor would diversify their portfolio; to make the currency even more stable and hedge against the risks a single pegged currency might face when the anchor currency suddenly devalues, such as high inflation.
A currency can also be pegged to a reliable commodity, such as gold. For many years, before WW2 and the Bretton Woods agreement, the Gold Standard was widely used to stabilize currencies. However, governments and economists believe the practice can actually stifle growth. Although central banks might still hold some gold as a form of backing, the last currency to decouple from gold was the Swiss Franc in early 2000.
What is collateralization?
Collateral is defined as “To offer an asset as a surety that a debt will be repaid.” Basically, it’s the asset that the borrower leverages to secure a loan from the lender. The most common example we’ll all be familiar with is mortgages, where the bank customer is able to obtain a loan to buy a house based on the provision that the bank may repossess the house if the customer defaults on their repayments. The house serves as backing or security on the loan and reduces the lender’s risk.
Difference between backing and collateral
When a currency is backed by another commodity or asset, it does not necessarily mean the holder of the currency has that surety to exchange it, or have a claim on, the backed commodity. If we look at the Venezuelan Petro, example above, a holder of Petro tokens cannot exchange it for a physical barrel of crude oil. However, it does mean that physical barrels of crude oil are held in reserves to stabilize the cryptocurrency and to give it a fixed exchange rate.
As the market matures, stablecoins are becoming a more prevalent presence in the cryptocurrency space. New investors are continually looking to get into the crypto market, but at low risk and high security, while seasoned investors are looking for options to stabilize their portfolios and a safe haven in case of severe market downturns. This continued search is sure to bring up some interesting mixing and matching of pegs and backings. Who says you can’t have a stable coin backed by Ether and pegged to the Japanese Yen? Ethereum Founder and cryptocurrency influencer, Vitalik Buterin, had the following to say on the need for effective stablecoins:
“Are stable-value assets necessary? Given the high level of interest in "blockchain technology" coupled with disinterest in "Bitcoin the currency" that we see among so many in the mainstream world, perhaps the time is ripe for stable-currency or multi-currency systems to take over.”