One of the main problems for the massive adoption of Bitcoin and the cryptocurrencies in general is their high level of volatility an despite their intrinsic advantages, such as the low costs of the transactions, their global reach and decentralization.
The constant ups and downs of the prices of the cryptocurrencies on the market is one of the characteristics that makes the cryptocurrencies unattractive for many common users.
This is what triggered the idea to create cryptocurrencies that maintain a stable price, known as the stablecoins. The goal of these cryptocurrencies is to create a fusion of the best characteristics of the fiat currencies and the cryptocurrencies: globality, decentralization and low volatility.
The stablecoins are cryptocurrencies designed to maintain a constant price, they are linked to a stable fiduciary currency or collateralized with products or other cryptocurrencies.
At the moment, there are a number of currencies that would like to achieve this ideal union between the cryptocurrencies and the fiduciary money. This way, three large categories of stable tokens were created: the ones that are guaranteed by fiat currencies and products, the ones that are backed up by other cryptocurrencies and the ones that do not have guarantees.
In the first group, the cryptocurrencies are guaranteed by a equal amount of fiduciary currency maintained by a custodian. The owners have the guarantee of cashing their tokens for the stable value chosen for the parity and with a fixed 1:1 relation.
Even though this system guarantees stability of the prices, some experts think it contradicts the concept of the decentralization that characterizes the blockchain technology. This is because this type of cryptocurrencies requires a confident custodian that should be subject to audit.
Another problem is related to the liquidity, because large amounts of capital that serve as backup are required if the goal is to achieve a massive adoption of tokens. Some of the stablecoins belonging to this type of cryptocurrencies are Tether, Digix Gold, TrueUSD and USD Coin will join them in the future.
Tether (USDT) is the most famous example of the stablecoins. It was originally launched as Realcoin back in 2014 when the project was launched. The project has two coins: USDT and EURT, which are analogue to the United States dollar and the euro. Both cryptocurrencies are connected with Bitfinex, one of the largest cryptocurrency exchanges in the world.
The protocol for the emission of the aforementioned cryptocurrencies is called Omni. Omni is a platform for the creation of tokens based on the blockchain network of Bitcoin. The platform recently decided to emit two ERC-20 tokens based on the blockchain network of Ethereum, the USDT linked to the US dollars and the EURT linked to the euro.
Tether quickly became a substitute for the dollar on the cryptocurrency exchange platforms, with around 2.5 billion dollars worth of tokens in circulation, according to CoinMarketCap.
However, Tether was also object of questioning since it does not provide any information about the custodian and the reserves, which is why many people believe the cryptocurrencies does not have enough guarantees. The emission of almost 1.8 billion USDT tokens between November, 2017 and January, 218, without any audit related to the reserves for this amount of tokens, caused a lot of suspicion in the crypto community about the validity of the tokens. At the beginning of this year Tether was investigated by the authorities in the United States of America.
Trueusd (TUSD) is another token linked to the US dollar and it is part of the TrustToken platform. The token was created in 2018 with the goal of being more transparent than Tether.
This cryptocurrency was created as an ERC-20 token based on the Ethereum’s blockchain network. There are 16.6 million tokens in circulation at the moment, according to its smart contract.
The reserves for TrueUSD are kept on the accounts of various fiduciary companies that signed custodian agreements and not on bank accounts controlled by a single entity. According to TrueUSD, the contents of the aforementioned accounts is published every day and regular monthly audits are performed as well.
Binance, one of the largest cryptocurrencies in the world, was supposed to list this cryptocurrency on its exchange platform on May 18th, but this was prolonged for tomorrow, May 22nd. The reason for the delay is that the development team of TrueUSD needs more time to achieve the necessary liquidity in order to meet the high demand, according to a statement issued by Binance.
This situation is a good example of the liquidity problem that can appear with this type of stablecoins.
Digix Gold (DGX) is backed up by gold. The project started back in 2014 in Singapore when a company called Digix decided to launch a new cryptocurrency. The company assures that each token is equal to the value of one gram of gold approved by the London Bullion Market Association (LBMA).
In its Ethereum smart contract, Digix Gold says 32,300 tokens worth 1.4 million dollars were emitted for the time being. Currently, it looks like Digix Gold does not have a lot of movement on the market, because only around 4,000 dollars were moved in the last 24 hours, according to CoinMarketCap.
The company behind the cryptocurrencies assures the investors it is possible to exchange 100 dgx tokens for 100 grams of physical gold.
The launch of the USD Coin (USDC) was recently announced by a company called Circle, a FinTech subsidiary of Goldman Sachs. The entity in charge of managing the new cryptocurrency is called CENTRE and it is responsible for the emission of USD Coin.
This cryptocurrency is backed up by the United States dollar, it will be emitted as an ERC-20 token based on the Ethereum blockchain network. The cryptocurrency is scheduled to be launched in the following months. USD Coin will be listed on Poloniex, a cryptocurrency exchange recently acquired by Circle and the cryptocurrency exchange plans on offering many benefits to the future users of USD Coin in order to foment its adoption.
The stablecoins collateralized with cryptocurrencies are backed up by the reserves in other cryptocurrencies. The goal of this type of stablecoins is to solve the centralization problem of the stablecoins backed up by fiat currencies, but it is somewhat paradoxical since the reserves are kept in a volatile cryptocurrency.
To solve this problem, the reserves in other cryptocurrencies are double the value of the stablecoin backed up by these reserves. This way a 1:2 parity is established, which means that if the stablecoin is quoted at one dollar, the backup should be double this amount. This generates more freedom of action in case the cryptocurrencies that serves as a backup loses its value. BitUSD and Dai belong to this group of stablecoins.
Dai (DAI) was developed by a company called MakerDAO. The tokens started circulating in December last year and are backed up by the ethers (ETH) owned by each user. The reserves are maintained in smart contracts. Dai is an ERC-20 token based on the Ethereum blockchain network.
A user can generate DAI by blocking a double quantity of ethers in a smart contract. If the user would like to access his or her guarantees, the amount in DAI needs to be returned. Likewise, the reserves are automatically sold if the ether drops below a predetermined threshold.
According to its smart contract, there are 37.6 million DAI tokens in circulation at the moment. In the last 24 hours, the total transaction volume of DAI was more than 625 million dollars. This token is mainly listed by the decentralized cryptocurrency exchange platforms based on Ethereum.
BitUSD (BITUSD) was created by Dan Larimer back in 2013 and it is backed up by a cryptocurrency platform called BitShares, which also serves as a guarantee for BitCNY and BitGold, as well as other tokens, which are all called BitAssets.
The cryptocurrencies linked to the market can be negotiated as contracts called SmartCoin, whose goal is to increase the reserves of the guarantee. This way, the decentralized platform acts as a central bank and creates the stable token that is lended to the users.
In order for the BitShares system to lend a BitAsset, a user needs to own a cryptocurrency called BitShare (BTS). The user needs to have four times more BTS than the amount of the loan and this amount of BitShares is blocked to automatically cover the cost and reimburse the loan, in case the situation on the market is not favorable. When the loan is paid back or if the system is forced to use the guarantee, the created BitAssets are destroyed.
According to CoinMarketCap, more than 14.8 million BITUSD tokens were emitted and this cryptocurrency is mainly traded on the decentralized cryptocurrency exchanges based on the BitShares blockchain network.
The third category of the stablecoins is formed by the stable tokens without collateralization. These tokens do not have any guarantee backed up by assets. The stability of the prices is achieved through Seigniorage shares, a concept created by Robert Sams, the founder and CEO of Clearmatics Technologies LTD.
With this type of stablecoins, the smart contracts are programmed to act as a reserve bank, which allows to increase or decrease the supply of money inside the blockchain network.
This way the value of the stable cryptocurrency adjusts to the value of a linked asset, such as the dollar. This system functions on the principle of offer and demand. If the currency is quoted very high, the smart contracts removes tokens and increases the supply, thus decreasing the value of the token. The stablecoins belonging to this category are NuBits and Basis (Basecoin).
Basis, which was known in the past as Basecoin, is a token that was recently launched and fixes its price to one US dollars. The idea is to enable it to be linked to a basket of assets, such as the consumer price index (CPI), as the owners use the currency to purchase goods and services. The focus of Basis is on the contraction and expansion of the supply of the cryptocurrency, depending on the movement of the market.
The protocol is decentralized and depends on the data provided by third parties. It adjusts the quantity of tokens in circulation depending on their value on the market. This is achieved by using three different tokens: basecoin, base bonds and basic stocks.
If the value of a token is superior to one dollar, Basecoin releases more token to the owners of basic stocks and allows the owners of the base bonds to sell tokens. When the price drops below one US dollar, the amount of tokens is reduced to allow the owner of the currencies to buy bonds. The cryptographic currencies used to buy bonds are destroyed afterwards.
NuBits (USNBT) was launched back in 2014. It uses a decentralized liquidity funds based on the blockchain technology that offers the users the possibility to control their resources and cash the tokens in exchange.
The platform cradles new currencies to meet the demand of the users, if the users agree to do it. The network controls the supply of cryptocurrencies in circulation in an effort to maintain the stability of the prices, which is manages to maintain around one US dollar.
Some analysts think this type of stable cryptocurrencies is the most viable option when it comes to achieving a wider adoption of the cryptocurrencies and their usage in everyday life. This is because this category of stablecoins imitates the stability mechanisms used by the reserve banks in the fiduciary system, but without giving up the decentralization and independency.
However, in general terms, the creators of all these types of stable cryptocurrencies affirm, independently of the classification of the stable token, that this type of cryptocurrencies solves the obstacles of volatility of the cryptocurrencies and also enables them to be widely used to make purchases, sign contracts, determine prices of good, etc.
On the other hand, some analysts think the concept of the stablecoins eliminates the original goal of Bitcoin and similar cryptocurrencies and that is to reduce the monetary dependency on the central banks. The stablecoins create private digital central banks and this does not solve the problem. Moreover, the analysts point out the fact that the stablecoins do not differentiate very much from the FinTech services offered by various traditional banks or companies such as PayPal.
There is a lot of scepticism when it comes to the adoption and implementation of the stablecoins outside the cryptocurrency exchange platforms.